Foreign Investors to Bolster U.S. CRE Market

Foreign Investors to Bolster U.S. CRE Market



Despite an uncertain political climate, foreign investors are keen to continue investing in U.S. commercial real estate. In fact, the U.S. continues to be the single largest recipient of foreign direct investment (FDI) in the world, to the tune of more than $450 billion from other countries since 2016, according to the Bureau of Economic Analysis at the Department of Commerce.

Commercial real estate continues to be the sector of choice for many foreign investors, with the majority of capital flowing to the largest metropolitan regions. (Manhattan alone represented nearly a fifth of all foreign investment in U.S. commercial real estate in 2017, greater than the next three markets combined.)

Why the interest in this sector of the country’s economy? As the economy here has largely recovered from the financial crisis and is fueled by strong job creation and business expansion, it’s been viewed as finally stable, especially in comparison to the financial woes of some markets throughout Europe, where the economic turmoil caused by Brexit has turned off many would-be investors.

Because real estate has long played an integral role in global investors’ portfolios, some investors have been waiting for a more robust economy—which is now a reality—to pounce on opportunities.

The U.S. market is also renowned for its scale and liquidity, providing foreign investors the flexibility to exit their investments if they decide to invest their capital elsewhere. But the question for investors has been which types of properties to invest in. Much of the focus in the commercial real estate industry from an FDI perspective is on big transactions in major cities. However, the best investment opportunities may actually be in suburban markets or in second-tier cities where there is more room for growth. For example, instead of focusing on the Los Angeles market, some foreign investors have zeroed in on nearby small-town-feel areas, like Long Beach, which offers many of the same benefits as its neighboring city, yet is more competitively priced. These so-called “tier II communities” offer opportunities for diverse types of properties, as well. Investors are limited to space in traditional skyscrapers, which may reach out of their budgets; smaller markets tend to have a glut of small buildings and shopping centers that are a bargain.

However, there are reports of foreign buyers failing to conduct thorough due diligence before signing on the dotted line for property, which can create problems for commercial property owners down the line. Some don’t seem to appreciate that there are night-and-day differences between the risk involved with properties depending on where they are located. A small, Midwest retail building has very different risk factors than one in a major city. That’s why it’s crucial for foreign investors to work through a broker or financial advisor who understands local markets.

Most FDI in the U.S. comes from the world’s largest economies, including the United Kingdom at $598.3 billion, Canada at $453.6 billion, and Japan at $424.3 billion, and there’s no indication that capital will stop being injected into the U.S. economy any time soon.

 

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