U.S. commercial real estate surged to $94.9 billion last year
According to Real Capital Analytics, during 2018, foreign buyers represented 17% of total U.S. deal activity in 2018. In fact, $94.9 billion where invested by foreigners in commercial real estate.
There was an enormous growth of 73% when compared to 2017 ($55.3 billion). That spike is a clear sign that the U.S. is still and interesting market for foreign investors. Note that this this trend is fed by some mega-deals like Brookfield’s nearly $15 billion acquisition of GGP and their purchase of Forest City for $11.4 billion.
Source: Real Capital Analytics
We know that the higher the risk, the higher the gain or the loss. Even though for players this might be tempting, what we see it that stability looks sexy for investors.
To confirm this stability we should have a look at U.S. economy. In the last few months, even with the trade war, we see signs of economic stability in the U.S. Economic data continues to display full employment, rising wages, low inflation, low interest rates, higher GDP and more investments pouring into the U.S.
GDP Evolution in the US Source: BEA 2019
Mega-deals helped, for sure, building the 2018 spike, and real estate professionals expect that this trend will continue during 2019.
For foreign buyers one opportunity that is arising might be REITs that are trading below net asset values.
Canadians are still the main investors
Canadians are the main investors in the U.S. commercial real estate. On the other hand, even though the investment coming from Chinese citizens has decreased, followed by its monetary policies and the recent trade war, the U.S. continues to seduce Asian customers.
With $4.2 billion investment in commercial real estate in the U.S., Singapore was is on the top 3 foreign investors in the country. According to Maggie Coleman, managing director in the international capital markets group of real estate services firm JLL Singaporean investors are looking to the U.S. for diversification, and higher yields.
An expected increase of foreign investment in multifamily properties
Foreign capital is moving from its' traditional office and hotels property type to another kind of property types such as industrial, multifamily, medical office, healthcare and data centres. In 2018, there was a 15 billion investment in the multifamily sector by foreign investors, according to JLL.
Canadian investors were the dominant buyers in the multifamily sector, and during 2019, there is an expected increase of foreign investment in these kind of properties.
According to NARS, in 2019, multifamily and industrial properties will continue to be strong commercial asset classes. The multifamily market is expected to remain interesting due to its low vacancy rates and affordable rents
Vacancy rates per property type Source: NARS
E-commerce will continue to support the industrial properties transaction, and the office market will be sustained by the growth of job offers in the IT sector.
What will be the main challenges for foreign investors?
One of the main challenges foreign investors might face are the rising interest rates that would increase hedging costs. These costs were specially important after the U.S.A. governments increase in interest rates. Note that while this happened in the U.S., other central banks around the world have yet to follow suit. However, is it important to state that interest rates have moderated in the beginning of 2019.
An example of this dynamic is the Samsung SRA Asset Management that acquired the US Bank Tower in Denver. One other example is the Commerz Real in Germany that bought the National office building in Chicago.
US Bank Tower in Denver
According to Alex Foshay, from Knight Frank, last year these groups were focused on gateway CBD office markets. Now they are looking at markets where they can expect higher returns to compensate for hedging costs.
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