Foreign Investment in U.S. Real Estate: Gateway Markets Still on Top

Summer 2013

To foreign investors, commercial real estate in the U.S. looks like “the cleanest shirt in the dirty clothes pile,” as one such investor told Jim Fetgatter, chief executive of the Association of Foreign Investors in Real Estate (AFIRE) at a recent investment conference. That should not have come as a surprise, considering that AFIRE’s annual survey among its 200 members showed that four of the five cities selected as the top global cities for investment dollars are in the U.S. That was the first time since the question was first asked in 2001 that this was the case.

Those top cities are, in order: New York, London, San Francisco, Washington, D.C., and Houston. This survey also marked Houston’s debut among the top five.

The survey also showed that:

  • The U.S. is still considered number one for providing the most stable and secure real estate investments and it also represents the best opportunity for capital appreciation;
  • Preferred property types were, in order: multifamily, industrial, retail, office, and hotel (with retail and office switching rankings from the year before);
  • 81 percent of respondents plan to increase their portfolio size in the U.S. this year, none reported plans to decrease their U.S. portfolios;
  • 71 percent of respondents believe that improving fundamentals will make secondary markets in the U.S. more desirable this year; and
  • Top emerging markets for real estate investment were, in order, Brazil, China, Turkey (moving to number three from number seven from the year before), with India and Mexico tied for fourth place.
Jim Fetgatter

Jim Fetgatter

Fetgatter sees the move to secondary cities in 2013 as a logical, gradual sequence. Reasons: like all investors, AFIRE members are looking for yield. With some properties in top markets selling at peak prices like those recorded in 2007, investors have to go to secondary markets or look for value-add properties. The challenge is that they don’t necessarily understand the exit strategy in secondary markets, Fetgatter said, but if they do buy, they will look for the best product in that secondary market.

Most AFIRE members are institutions and tend to buy existing properties, Fetgatter reported. Rather than get involved in the development process, they prefer to buy after construction is complete. He also noted that a lot of investment capital is coming to the U.S. from the Middle East — particularly from Qatar.

The survey was conducted by the James A. Graaskamp Center for Real Estate at the Wisconsin School of Business.

chart showing the Ranking of USA Cities for Real Estate Investment

Oh, Canada!

According to Jones Lang LaSalle’s Capital Markets group, foreigners invested $163.7 billion in U.S. real estate in 2012. By far, it reported, Canada has been the most dominant foreign investor in U.S. assets during the past three years.

Among Canadians, Canadian pension funds invested the most capital into U.S. real estate in 2012, with the largest volume of activity reaching $2.11 billion, executed by CPP Investment Board. One reason: until 2005, Canadian pension funds were limited to a ceiling on the amount of investment they could deploy outside of the country. However with the elimination of the Foreign Property Rule (FPR), funds are now free to invest larger amounts. Much of this activity has been targeted toward retail real estate, with particular interest in coastal markets such as Seattle, San Diego, and San Jose.

Steve Collins, international director of Jones Lang LaSalle’s Capital Markets, said that Canadian investment represented about one third of all foreign investment into the U.S. last year, but suggested that this Canadian pipeline could slow as property values rise.

chart showing Assumptions about Future Events

One major Canadian player is Oxford Properties, in its role as real estate investor for the Ontario Municipal Employees Retirement System. Oxford is partnering with New York developer Related Companies on Hudson Yards, the $15 billion residential and commercial project on Manhattan’s West Side. Oxford is also part of a joint venture to build a $450 million project in Washington, D.C., with 620,000 square feet of office and retail space. Oxford has invested $1.5 billion in U.S. real estate and expects that figure to rise to $5 billion by 2015.