Foreign Investors Continue to Seek Stability in U.S. Real Estate

Global investors today face good news and bad news.

On the positive front, the COVID-19 lockdown that hit much of the world in 2020 is mostly in the rearview mirror. Many countries are getting back on track (with China, among the major economic players, the possible exception).

However, the “other side” includes economic headwinds (inflation), geopolitical conflict (Russia’s invasion of Ukraine and subsequent “saber rattling” by other countries), and the hampering of the global movement of goods. (supply chain disruptions). While these factors continue to create challenges for investors, they have also increased the attractiveness of US commercial real estate as a “safe haven” for capital. This phenomenon is evident in today’s transactional activity, despite America’s own economic, political, and social challenges.

a recent report noted that the volume of cross-border investment in the US was $6.5 billion in the second quarter of 2022, an increase of 16 percent year over year. At the beginning of this yeara survey conducted by the Association of Foreign Investors in Real Estate (AFIRE) reported that 76 percent of respondents planned a net increase in investments in the US during 2022, while 82 percent indicated that they plan to increase their commercial real estate in the US in the next decade .

Active and local

Commercial real estate is a very broad industry. As such, two issues to consider when discussing foreign investment in US real estate are:

  • Different asset classes are in different phases of their real estate cycles.
  • Geographic markets have different fundamentals and the resulting demand.

Given these factors, this is where foreign capital is primarily going and why.

Multifamily and industrial assets

Multi-family homes remain an attractive asset class for domestic and international investors because, quite simply, people need a place to live. Fundamentals affecting the US apartment market include high home prices and rising mortgage rates. These factors, along with a still tight supply of single-family homes, keep potential buyers on the sidelines as renters.

Yardi Matrix’s recent US Apartment Overview reported that national multifamily occupancy was 96 percent (deemed “full”), while demand and rent growth also expanded. This helped make multi-family housing the leading sector for incoming cross-border investment in the second quarter of 2022 at $3 billion, according to CBRE data. There are no visible signs that this activity is slowing down, as 90 percent of AFIRE respondents indicated that they would increase their exposure to US multifamily product in the next three to five years.

At the same time, the industrial sector, specifically last-mile warehouses and distribution centers, is also on the radar of domestic and foreign investors. During the second quarter of 2022, the industrial product at the national level reported new vacancy lows and double-digit rental growth, along with high absorption rates. Despite the market turmoil in recent months, demand for industrial space continues and investors both foreign and domestic see the sector as a “must have” for their portfolios. From a volume standpoint, cross-border investments in US industry totaled $2 billion during the second quarter, according to CBRE. Similar to multi-family investments, this trend is likely to continue. Seventy-five percent of those surveyed by AFIRE said they want to add more US industrial products to their portfolios in the next half decade.

It should be noted, however, that there is a growing interest in “alternative” real estate sectors, including single-family residential homes, student housing, self-storage, and other types of properties not previously considered “institutional.”

Secondary and tertiary markets

Another mindset shift is that foreign investors are increasingly embracing secondary and tertiary markets, versus a previous limited focus on US gateway cities and urban cores. Deloitte reported that Sunbelt cities including Austin and Dallas-Fort Worth, along with Charlotte, Denver and Nashville, are attracting more interest, in part due to lower tax incentives. Other areas of interest include Atlanta, Phoenix and Seattle.

Based on data from Real Capital Analytics, the Deloitte report also indicated that gateway markets have attracted only 27 percent of foreign investment, with the remaining capital channeled into the remaining primary locations and secondary and tertiary markets.

The Deloitte and RCA information is supported by AFIRE respondents, of whom 71 percent reported that they would increase their holdings in US secondary markets over the next several years. Meanwhile, only 32 percent indicated that they would invest in US cities during the same period.

America’s lure

None of the above suggests that US real estate investment has gone from strength to strength. The increase in the value of the US dollar means that it is more expensive for international direct investment. The price of coverage has also gone up. Despite this, foreign investors continue to set their sights on US commercial real estate for the following reasons.

greater stability

Although the United States faces several economic challenges, continued job and business growth suggests relative stability compared to other regions of the world. The UK continues to grapple with the fallout from Brexit, while China’s ongoing lockdowns to prevent the spread of COVID-19 have stalled that country’s economic growth. The Russian invasion of Ukraine is also causing GDP to contract in many European nations. For those investing in the US, the country represents less geographic exposure to conflict-ridden regions.

In fact, the current recession offers opportunities, as many types of real estate assets are likely to do well during economic downturns.

Consistent returns and currency strength

Compared to the real estate sectors of Europe and parts of Asia, US commercial real estate offers the potential for higher returns and more stable cash flows. The United States is also known for its scale, liquidity, and flexibility, allowing investors to change strategies if they decide to place their capital elsewhere.

Additionally, the US dollar offers a degree of stability amidst international currency fluctuations. The dollar is the global reserve currency, which suggests less currency risk when buying US real estate.

portfolio diversity

The United States is a large country, with different real estate markets and submarkets and a variety of commercial real estate products. Each market and asset class is driven by unique fundamentals that can meet various objectives and strategies while offering risk management opportunities. Multiple product types in many markets support portfolio diversification while enhancing the potential for higher returns.

Rule of law

The United States has a strong tradition of the rule of law, providing legal protections that may not be available in other countries. Commercial real estate transactions and other actions are carried out in a fair and ethical manner, without hidden agendas or potential illegalities such as bribery.

JLL Global Real Estate Transparency Index 2022 ranked the US as the second most transparent market for real estate out of 99 countries and territories. This is attractive to foreign investors as it means they can rely on clear information and disclosures, leading to well-informed decision-making and realistic expectations.

Investment security in times of uncertainty

Due to international volatility, geopolitical conflicts and inflation, foreign investors continue to view US real estate favorably. International investors have broadened their investment “scope”, looking beyond primary and entry markets to secondary and tertiary locations, as well as looking beyond “major food groups” to other real estate sectors expected to benefit. of secular and cyclical changes. We anticipate continued strong interest in US real estate from foreign investors, given the country’s overall ability to recover from periods of economic instability.

Paul Jackson is Managing Partner at the London-based Accord Group.

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