M&M: Foreign Investment in U.S. Remains Elevated

Foreign investment in U.S. commercial real estate has eased from last year’s peak level but remains elevated, reported Marcus & Millichap, Calabasas, Calif.

M&M Vice President of Research Services Jay Lybik said total direct foreign investment in U.S. CRE exceeded $90 billion last year, accounting for 17 percent of total U.S. commercial real estate dollar volume. Historically, international investment in the U.S. has averaged 9 percent of total CRE volume. He noted that the dollar’s rising strength has slowed foreign investment but said international investors still accounted for nearly 11 percent of the dollar volume of all U.S. properties sold in the first half of 2016.

“Global financial market volatility, weak foreign economies, low alternative investment yields and a variety of factors creating uncertainty have reinforced the advantages of direct investment in U.S. commercial real estate,” Lybik said in M&M’s Special Foreign Investment Report. “Together, these forces have drawn additional foreign investment to the U.S., encouraging many to focus on capital preservation and asset stability rather than yield.” 

Lybik said because foreign investors’ objectives are often quite different from their domestic counterparts, they sometimes outbid domestic parties for specific assets. And because the source of foreign capital is often hidden and channeled through U.S.-based funds and entities, competitors and sellers often do not realize the bidder is actually from abroad.

Lybik noted that more than 70 percent of foreign dollar volume was concentrated in office and hotel assets in first-half 2016. But from a transactional perspective, apartments and industrial properties led with a combined 57 percent of direct purchases by cross-border capital.

“Large deals grab headlines,” Lybik said. “Considerable press is dedicated to high-profile acquisitions made by international investors such as the $1.95 billion purchase of the Waldorf Astoria in New York City by Chinese investors last year. However, the majority of the acquisitions tend to be smaller assets purchased through funds and domestic intermediaries.” 

The report noted that foreign investors traditionally favor gateway cities because of the “brand value” of well-known metropolitan areas and because these cities tend to face lower pricing volatility and maintain high market liquidity. “Although some international buyers, particularly Canadians, venture to a wider range of markets, nearly half of last year’s foreign capital invested in commercial real estate was concentrated in five major markets: New York City, Los Angeles, Atlanta, Chicago and Dallas,” he said. 

San Francisco and Phoenix pushed out Atlanta and Dallas to appear in the top five this year, Lybik said.