Foreign CRE Investors Weigh Opposing Forces
While the strong dollar makes acquisitions costlier, the U.S. offers a safe haven from geopolitical upheaval.
New York City skyline. Image by ben o’bro via unsplash.com
International geopolitical and economic uncertainty has solidified the standing of the U.S. as a port in the storm for foreign investors in commercial real estate. History’s third-highest cross-border volume year came in 2021, when in spite of persistent pandemic-related angst $62 billion was invested in all U.S. property types. But investment pace has slowed greatly in 2022, with rising interest rates adding to debt market volatility.
“Nevertheless, some foreign investors utilize all cash or low-leverage strategies, and therefore have been able to deploy capital despite the volatility,” said Riaz Cassum, capital markets global head of international capital coverage at JLL.
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At present, international investors are trying to balance two countervailing forces, said Loryn Arkow, a partner in the real estate practice at Stroock & Stroock & Lavan. On one hand, the U.S. market’s attractiveness as a comparatively safe haven has grown even more appealing at a time of economic uncertainty and an Eastern European war. That has to be weighed against the U.S. dollar’s appreciation vis-a-vis many foreign investors’ currencies, which has made U.S real estate more expensive.
Hottest types
Industrial and multifamily assets appear to be of greatest interest to foreign investors, with life science, self storage and student housing also spurring interest. Cross-border investment interest has also been seen in gateway market Class A office and select suburban office properties.
“Companies are looking to earn their employees’ commute and are looking to reduce square footage but improve the experience,” said Jahn Brodwin, co-leader of the real estate solutions practice, and senior managing director at FTI Consulting. “Thus, a big push to highly amenitized Class A office and upscale suburban locations near where employees live” among foreign institutional investors.
According to the Q2 2022 MSCI US Cross-Border Investment Compendium, cross-border investment volume has averaged 8 percent of total acquisition activity over the past year. That followed 2021’s bifurcated results, which saw cross-border at 6 percent of the total in the year’s first six months, but the second half higher at 10 percent.
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Foreign investors attempting to land assets in the industrial sector found competition stiff through the course of the pandemic. More recently, the industrial sector has softened a bit, Arkow said. “So, time will tell whether international investors will, given currency effects, look to acquire more industrial assets in the near term,” she reported.
Other experts see a flight to quality. Foreign investors are looking for Class A, main on main, newly built assets, and a greater inclination toward red business-friendly rather than blue states. “That’s usually what happens when the market takes a negative turn,” said Ran Eliasaf, founder & partner of Northwind Group. “Investors are reacting to the prospects of regulation. When they see laws pass at a faster pace, that will deter them.”
Attractive regions
Foreign investors’ allocation by region has changed since the pandemic’s worst days. Robust international capital being injected into Sun Belt and secondary growth markets reflects a preference among foreign investors for industrial, multifamily and alternative property types often concentrated in non-gateway markets “with demographic and population tailwinds,” said Cassum, adding foreign investment into the Dallas market is up substantially vis-à-vis five years ago, driven by Canadian and Singaporean groups.
For years, New York City and other gateway markets gained greatest favor from foreign investors. Over the past two years, Atlanta, Austin, Dallas and Boston have gotten the nod. “These are markets with younger demographics, greater affordability and cities with tech and med-tech” concentrations, said Gunnar Branson, CEO of Afire Group.
Stepping up
Interest in U.S. commercial real estate investment is coming from virtually every corner of the globe. Across continents, pension system officials seeking investment diversity as well as reliable, consistent growth want to acquire U.S.-based assets, said Branson. He specifically cited the pension plans in Canada, Japan and the Netherlands. Reason: “You have so many cities with a depth of institutional real estate to invest in, compared to, say, England or France, each with one or one and a half,” he explained.
In addition to Canadian private equity funds, South Korea, Singapore and Israel are also investing, Eliasaf reported.
High among foreign investment magnets is the Miami area. There, half the rich condo projects on Fisher Island are owned by Russians, and Doral is dubbed “Doralezuela” for the number of Venezuelans investing there, said Matt Rotolante, president of Lee & Associates’ South Florida office. European investors, as well as those from Central and South America, are keen on the market. Argentina and Venezuela investors historically pumped in funds; more recently, it’s been Peruvians and Chileans. “We also see a lot of money coming in from Saudi Arabia, as a result of the new LIV Golf,” he said.
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Latin Americans not only see Miami as a haven for their wealth, but for their families, he added. They choose Miami because a countryman of their acquaintance lives there. After buying a condo, they look to invest in a strip retail center or a warehouse. “After the first few deals, we see them start graduating to greater value,” he said.
Year ahead
Looking ahead to 2023, there’s clear expectation international investors will once more actively invest in the U.S. market, particularly in industrial and multifamily real estate. “Dry powder from cross-border investors earmarked for U.S. commercial real estate remains high,” based on the size and diversification of the U.S. market, Cassum said.
Keep an eye on ESG, which is only becoming more important to foreign investors with every passing month. “Think about the properties that performed well in the hurricane,” Branson said. “A lot of them were the newer, more energy-independent properties.”
In the short term, Eliasaf is among the more pessimistic observers.
“I think we’re heading for a big correction in value,” he added. “Eventually it will create opportunities. But it will be a painful road to get there.”
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