What’s Next for Foreign Investment?

By Anthony La Malfa, Partner, Real Estate and Hospitality Services, BDO USA: Who are the leaders of the foreign commercial REIT investment pack?

By Anthony La Malfa, Partner, Real Estate & Hospitality Services, BDO USALa Malfa_headshot

As a whole, foreign investment in U.S. commercial real estate is on the rise, totaling $45 billion in 2014, according to research firm Real Capital Analytics. This marks the highest level of investment in the industry since 2007. Even despite low oil prices and a strong U.S. dollar that has hurt exports in other industries, foreign investment in commercial real estate is only expected to grow throughout this year as international investors continue to be attracted by the stability real estate assets offer. According to the United Realty/Zogby Real Estate Confidence Index for the fourth quarter of 2014, about 60 percent of 113 institutional real-estate professionals surveyed said they anticipate a significant increase in foreign investment.

Who Are the Leaders of the Foreign Commercial Real Estate Investment Pack?

Investments from Canada, Norway and China have been most significant, reports World Property Journal. While we’ve seen investment from nations across the globe, including emerging markets like Singapore and some Middle Eastern nations, these three players are currently pumping the most capital into U.S. commercial real estate and REITs. Canada was the largest buyer of U.S. real estate in 2014 with 26 percent of direct foreign investment, followed by Norway and China, with 12 percent and 10 percent, respectively.

Their dollars are primarily being allocated towards “trophy assets,” as well as “gateway” markets. For example, the Government Pension Fund of Norway, one of the largest sovereign wealth funds in the world, recently closed on its purchase of a 45 percent stake in a 40-story skyscraper at 11 Times Square in Manhattan for $401.9 million, a deal that valued the 1.1 million square foot property at $1,273 a square foot, according to reports from the Wall Street Journal.

Strong Demand for “Safe” Investments

Despite a stronger dollar, foreign investors are not shying away from U.S. commercial real estate as they continue to have an appetite for these hard assets thanks to low interest rates and strengthening property fundamentals. Foreign investors are attracted to the safety U.S. properties afford, especially when they might be experiencing financial distress in their own countries coupled with a weakening of currency.

Especially appealing to foreign investors are traditional “gateway” markets, like New York, Washington, Southern California, and Southern Florida. “Trophy assets” in these markets often come with consistent rent rolls and predictable streams of net cash flow. They are also considered more secure because the market is large, relatively liquid, and consistent over time. From a liquidity perspective, assets in these markets are easier to sell, which is beneficial for the foreign investor who is typically interested in the long-term holding versus the immediate return.

Foreign investors are also demonstrating an interest in secondary U.S. markets, such as Atlanta, Seattle, and San Diego. For example, Bahrain-based Investcorp acquired a portfolio of multi-family communities in the metropolitan areas of Washington, Orlando, San Diego and Baltimore for $300 million. While these markets may not always be considered as safe as gateway markets, they offer investors an alternative with potentially higher returns than the gateway markets in which availability is limited due to high demand. 

Investment in Central Business Spaces Indicates Strength in Office Real Estate Market

Foreign capital acquired $17 billion in U.S. office space assets in 2014, making up 45 percent of all foreign investment in U.S. commercial real estate, and this trend could continue throughout 2015. Of these investments, most were in central business district (CBD) spaces. And New York and Boston are the leading markets for foreign office investment. Testament to this is that in January, the Canadian investment firm Ivanhoe Cambridge bought the office building 3 Bryant Park from Blackstone for $2.2 billion.

As in 2014, the first quarter of 2015 experienced year-over-year increases in both net absorption and rental rates for CBD office space, although the increases were somewhat subdued. The slower increases were partially due to seasonality and, with respect to absorption, partially due to new available space. As companies try to cater to the growing numbers of millennials in the workforce, the lack of demand for suburban office space has contributed to the strong performance of CBD office space. Therefore, it is noteworthy that the end of 2014 saw an uptick in foreign investment in suburban office space as well, indicating interest in office properties across the board, despite the trend toward centralized business space.

Foreign Investors Getting in On Ground-Floor Of Major Development Projects

The development landscapes of primary markets in the U.S. have long been dominated by local players, such as private-equity funds or pension funds. Wealthy foreign investors, including sovereign funds looking to shift funds away from oil markets, are now outbidding these traditional players, according to the Wall Street Journal.

They’re drawn by the potential for higher investment returns compared to an existing property and are less risk-averse than traditional players. While established, fully-leased commercial real estate properties are safe investments and appealing, many foreign investors are enticed by potential for higher returns. There has been an onslaught of major towers in large metropolitan markets like Boston, New York and Washington, D.C., funded by newcomer foreign backers.

Foreign Investment Helps Pave Way For Brighter Industry Outlook

As international capital flows into domestic real estate markets, there could be investment across the board in domestic markets large and small. According to CoStar, the cross-border flow of investment dollars into the U.S. commercial real estate appears to be gaining strength this year as foreign investors cast a wider net to cover markets outside the core gateway cities. Couple the influx of foreign investment across markets with a strengthening economy, and the future for commercial real estate looks bright.