Incoming international capital to the US Commercial Real Estate is soaring, as global investors seeking safe harbor in the face of changing worldwide economic conditions are pursuing property investment interests across America. This flow of money is coming at a time when the industry has been under pressure for several years.
Global Capital’s Strategic Reorientation
Investors from foreign countries have been snapping up US commercial properties at a breakneck pace in the last year. International buyers are investing billions of dollars in a range of property types, including office buildings and industrial warehouses to multifamily housing and retail centers. This trend represents a significant turnabout from the cautious stance adopted by several overseas investors during the pandemic and in its immediate aftermath.
Several things conspire to make them interesting again. This comes as the strength of the US dollar has buffeted American exporters while making it easier for foreign purchasers with appreciating currencies to invest in real estate. The relative calm of US property markets, even in a year when growth is widely expected to fall off the cliff, has helped to push the appeal of America as a safe haven for capital.
What’s Driving the Influx
A number of key forces are drawing foreign money into United States commercial real estate:
Attractive valuations have popped up as real estate prices adjusted lower from their pandemic-era highs — especially in the office world. This adjustment has given international value investors an opportunity to enter and takes advantage of the undervaluation of quality assets.
Advantage on yield matters as well. Likewise, returns on United States commercial properties are typically higher than investments in Europe, Asia or other developed markets that have had ultra-low interest rates pushing down yields for years. And while rates in the United States have gone up, for many foreign buyers, the spread is still favorable.
Diversification remains a theme pushing foreign institutions to diversify away from concentration risks in their home markets into the local market. The pension funds, sovereign wealth funds and insurance companies are crossing borders to achieve their equilibrium of availability of capital, geological spread choice/coverage, and business cycle variance.
Who’s Buying and Where
Canadians have long been the top foreign purchasers of US commercial real estate, and they still are. But European capital — mostly from Germany, Britain and the Netherlands — has flowed in heavily now. Asian investors are also actively putting cash to work, notably from Singapore, South Korea and Japan despite geopolitical tensions hitting some cross-border deals.
Gateway cities as diverse as New York, Los Angeles and San Francisco remain continuing favorites of foreign buyers seeking trophy assets and market liquidity. But secondary markets like Austin, Nashville, Phoenix and the Research Triangle in North Carolina are increasingly on international investors’ radars due to more favorable demographic patterns and rent growth prospects.
One sector in particular to have drawn attention is the industrial and logistics market, which is being bolstered by an ongoing surge in online shopping, requiring contemporary distribution centres. Multifamily housing also draws substantial foreign capital, particularly in markets where there is robust job growth and little new supply.
Navigating a Complex Landscape
US Market Entry for Foreign Investors when setting up a business in the United States can certainly be a challenge with rules, tax and structure considerations. The Foreign Investment in Real Property Tax Act (FIRPTA) can subject foreign sellers to withholding taxes, and Committee on Foreign Investment in the United States (CFIUS) reviews can muddle transactions related to properties located close to sensitive government buildings or infrastructure.
Sophisticated international buyers are still able to find ways of structuring investments in an economical manner, despite these challenges. Many operate on a form either through US partners or by setting up a domestically based investment vehicle to reduce complexity and benefit from tax efficiency. Partnerships with local American developers and operators have become more common, pairing foreign capital with market knowledge.
Implications for the Market
The flood of investment from overseas has big implications for US commercial real estate. International capital is offering a critical lifeline to a market that has seen just thin volumes over the last couple of years. This liquidity serves to create price discovery and can speed up the recovery of the market from recent tumult.”
But the influx also raises questions about longer-term market cycles. Some observers worry that high levels of foreign ownership in certain markets could heighten volatility during global economic shocks, as international investors might have different horizons and risk appetites than domestic buyers. Others point out that foreign capital can provide useful long-term perspective and patient investment strategies from which property markets can benefit.
For U.S. landowners and builders, the interest from foreign investors represents new exit strategies and joint-venture opportunities. For tenants and communities, it remains to be seen how new owners navigate their properties and address their stakeholders.
Looking Ahead
Foreign investment in US commercial real estate would appear to hinge on a number of moving parts: the state and trajectory of the US economy, exchange-rate effects, comparable returns abroad, and more favorable regulatory treatments for international transactions.
Commercial real estate is still in the process of undergoing transitions as a result of post-pandemic conditions — such as deliberations over office use, growing industrial demand and affordability crises in home markets — and foreign capital will be instrumental in determining its course. Whether this is a short, opportunistic wave or the start of an extended period of expanded overseas ownership remains to be seen, but for now, foreign investors seem to believe in American commercial real estate’s future.
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