Where Foreign Investment is Headed in 2016

05/20/2016

This has been a very strong year for foreign investment in U.S. commercial real estate. Nearly 20% of the total sales volume for CRE in the U.S. now comes from international capital. There are a number of factors that fuel this flurry of activity. Our economy is strong and stable, relative to other markets, and transactions are more transparent. Low interest rates and favorable spreads are attracting the attention of foreign investors with large amounts of capital to park in a safe place. Capital preservation and higher yields help to draw international buyers to the U.S. market.

Continued Expansion

Sources of the most foreign capital continue to be Canada, China, and Australia. It seems likely that China’s share of global real estate investment will grow, as that nation’s participation exceeded $10 billion for the first time last year. This growth continues to accelerate in response to the Chinese government’s loosening of restrictions on overseas investment.

The U.S. government is doing its part to encourage international investment as well, making significant changes this year to FIRPTA, which was originally passed 35 years ago with the intention of discouraging cross-border investment through heavy taxes on foreign buyers of U.S. real estate. Response to developments there as recently as October will surely accelerate as we move further into 2016.

According to a survey released by the Association of Foreign Investors in Real Estate, about 64 percent of foreign investors expect to make modest or major increases in their investments into U.S. real estate this year. And none of the surveyed investors are planning to decrease their investments. The group predicts continued growth in foreign investment for 2016.

Secondary and Tertiary Markets

Although foreign investors still tend to focus on the major U.S. markets, stiff competition and rising prices have led some to explore markets that were previously overlooked. Some of the markets seeing more international participation include Miami, Atlanta, Chicago, San Diego, San Francisco, Seattle, and Boston. As it becomes easier for investors to identify and verify opportunities in multiple markets, we expect this participation to increase.

Foreign Investment in High Quality Assets

International investors favor high quality assets such as regional shopping malls, office and industrial properties and multifamily properties. They tend to prefer established, occupied properties, but there is some indication that foreign buyers are more willing to participate in development schemes. As the ability to make connections is accelerated by technology, these buyers can make short work of the required due diligence involved in this sort of investment.

The increased level of international participation in CRE markets is in part a reflection of our shrinking world. Barriers are dropping as business and government alike see the benefits of increased access to the market. Technology has been utilized to create specialized platforms that make transactions more efficient and transparent, and the exchange of information proceeds at a blistering pace. Each of these circumstances points to even greater opportunity for international CRE in the coming year.