Cross-border Investment in US Commercial Real Estate

Spring 2016

Foreign investment in U.S. CRE both soared and shifted in 2015.

FOREIGN INVESTORS HAD quite the appetite for U.S. commercial real estate in 2015. They were involved in direct property purchases totaling $91.1 billion last year, making 2015 by far a record year for these investors. Their transactions accounted for 17 percent of all deal volume in 2015, up from an average of 10 percent for the previous four years.    

The biggest headline in the business press in 2015 was the emergence of Chinese investors as major players in the U.S. commercial property market. While these investors completed some signature deals, mostly in Manhattan, foreign appetite for investment in U.S. CRE was not limited to Chinese buyers nor to just Manhattan.

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The top foreign source of capital coming to the U.S. remained Canadian money. Canadian investors were also behind some signature deals, but escaped much of the scrutiny that was focused on Chinese investors, in part because Canadian investors have been active in the U.S. commercial property market for a long time. (See “Canadian Institutional Investment in the US,” Development, fall 2015.) Because Canada has a limited number of dense population centers and real estate assets in which Canadians can invest, they have long viewed U.S. CRE as an attractive investment. Surging wealth from the oil sands in Alberta over the last decade resulted in even more Canadian investment in U.S. CRE.

Although low oil prices and some struggles in the Canadian economy have resulted in market worries about the future of Canadian capital flow, these investors were net buyers in the U.S. in 2015, acquiring nearly double what they sold in the U.S. last year.

Shifting Sectors and Markets

Investors from Asia were the second most active cross-border investors in the U.S. in 2015, and the story was not just about China. Capital from Singapore took the No. 2 slot for 2015. Interestingly, much of the capital from Singapore was focused on the industrial property sector.  

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Traditionally, foreign investors have not been very active in the U.S. industrial property sector. Over the past 15 years, they have invested an average of only $1.5 billion per year. In 2015 this figure jumped a whopping 1,115 percent, to $27.3 billion.

As that foreign investment in the industrial sector jumped to a 30 percent share of all foreign investment in the U.S., it did another interesting thing: It changed the composition of the leading U.S. markets for commercial real estate investment.

Traditionally, foreign investors have piled capital into the nation’s six major metro areas, New York, Boston, Washington, Los Angeles, Chicago and San Francisco. It has always been easier to get a deal through an investment committee in one of these well-known global markets than to invest in stable but unremarkable properties in secondary markets.

Not only are the major markets better known by investment committee members, but the larger properties in those markets are simply easier to deal with from a time management perspective. It is, for instance, less time intensive to buy one asset valued at $1 billion in one of the six major markets than it is to pull together a number of small assets in multiple markets.

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The leading market for cross-border commercial property investment in 2015 was Manhattan, which typically leads the list, given the market’s high-profile nature. The growth in industrial activity, however, pushed a collection of markets known as “Tertiary West” to the No. 2 slot. This group of markets includes a number of small cities such as Reno, Nevada; Yuma, Arizona; and Bakersfield, California.

Can It Continue?

The real question the market faces today is not what drove foreign capital flows in 2015, but rather whether this level of investment can continue. The answer involves both demand and supply issues. On the demand side, despite challenges faced by some investors, particularly those dependent on petrowealth, interest rates are still low worldwide and there is a significant amount of sidelined capital waiting to be deployed. U.S. commercial real estate will still look attractive to many foreign investors.

On the supply side, there are only so many high-quality assets that can be traded. Increasingly, the market is seeing an uptick in joint venture activity, where foreign investors buy portions of existing assets. Deals like this allow U.S. investors who were active just after the global financial crisis to reap some gains while also continuing to hold an interest in the assets.

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As 2015 demonstrates, industrial assets are another pathway for capital. Ownership of U.S. industrial properties is highly disaggregated; many small investors hold small portfolios. Foreign investors, even if they liked the U.S. industrial story (rising rents and demand created primarily by e-commerce), traditionally could not access the market easily, as it simply was not time efficient to buy buildings one or two at a time. As long as the demand holds, there will continue to be business for investors consolidating individual assets to sell in portfolios. In 2016, it will be interesting to see if this portfolio play expands to other property types, such as the high-yielding suburban office market.