Global investors today face goods news and bad news.
On the positive front, the COVID-19 lockdown that impacted much of the world in 2020 is mostly in the rear-view mirror. Many countries are returning to business as usual (with China, among major economic players, the possible exception).
However, the “flip side” includes economic headwinds (inflation), geopolitical conflict (Russia’s invasion of Ukraine, and the resulting “saber-rattling” by other countries) and stymied worldwide movement of goods (supply chain disruptions). While these factors continue to create challenges for investors, they have also increased the attractiveness of U.S. commercial real estate as a “safe haven” for capital. This phenomenon is evident in current transaction activity—despite America’s own economic, political, and social challenges.
A recent report noted that cross-border investment volume into the U.S. was $6.5 billion in the second quarter of 2022, a 16 percent year-over-year increase. Earlier this year, a survey conducted by the Association of Foreign Investors in Real Estate (AFIRE) reported that 76 percent of respondents planned a net increase in U.S. investments during 2022, while 82 percent indicated they plan to boost their U.S. commercial real estate holdings within the next decade.
Assets and locales
Commercial real estate is a very broad industry. As such, two issues to consider when discussing foreign investment in U.S. real estate are:
- Different asset classes are in different phases of their real estate cycles.
- Geographic markets have different fundamentals and resulting demand.
Given these factors, here’s where foreign capital is primarily being directed, and why.
Multifamily and industrial assets
Multifamily remains an attractive asset class for domestic and international investors because, quite simply, people need a place to live. Fundamentals impacting the U.S. apartment market include high home prices and rising mortgage rates. These factors, coupled with a still-scarce supply of single-family homes, keeps would-be buyers on the sidelines as renters.
Yardi Matrix’s recent U.S. apartment overview reported that national multifamily occupancy was 96 percent (considered “full”), while demand and rent growth also expanded. This helped make multifamily the leading sector for inbound 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 diminishing, as 90 percent of AFIRE survey respondents indicated they would increase their exposure to U.S. multifamily product within the next three to five years.
At the same time, the industrial sector—specifically, warehouses and last-mile distribution centers—are also on domestic and foreign investors’ radars. During the second quarter of 2022, industrial product nationwide reported new vacancy lows and double-digit rent growth, along with high absorption rates. Despite the market turbulence in recent months, demand for industrial space continues, and both foreign and domestic investors are looking at the sector as a “must-have” for their portfolios. From a volume standpoint, cross-border investments in U.S. industrial totaled $2 billion during the second quarter, per CBRE. Similar to multifamily investments, this trend is likely to continue. Seventy-five percent of AFIRE survey respondents said they want to add more U.S. industrial product to their portfolios within the next half decade.
It should be noted, however, that there is burgeoning interest in “alternative” real estate sectors, including single-family residential housing, student housing, self-storage and other property types previously not considered “institutional”.
Secondary and tertiary markets
Another shift in mindset is that foreign investors are becoming more accepting of secondary and tertiary markets, vs. a prior narrow focus on U.S. 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, partially 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 remaining capital funneled into remaining primary locations, and secondary and tertiary markets.
The Deloitte and RCA information are backed by the AFIRE respondents, of which 71 percent reported they would increase their holdings in secondary U.S. markets during the next several years. Meanwhile, only 32 percent indicated they would invest in U.S. cities during the same period.
The appeal of the United States
None of the above suggests that U.S. real estate investment has been smooth sailing. The rise in the value of the U.S. dollar means it’s more expensive for international direct investment. The price of hedging has also gone up. Despite this, foreign investors continue setting their sights on U.S. commercial real estate for the following reasons.
Greater stability
Though America faces several economic challenges, continued job and business growth suggest relative stability, versus other regions in the world. The U.K. continues wrestling with the fallout from Brexit, while China’s ongoing lockdowns to prevent COVID-19 spread has stalled that country’s economic growth. Russia’s invasion of Ukraine is leading to GDP contraction among many European nations as well. For those investing in the U.S., the country represents less geographic exposure to conflict-ridden regions.
In fact, the current downturn offers opportunity, as many real estate asset types are likely to do well during economic downturns.
Consistent returns and currency strength
As compared to the property sectors in Europe and parts of Asia, U.S. commercial real estate offers the potential for higher returns and steadier cash flows. The U.S. is also known for scale, liquidity and flexibility, allowing investors to change strategies should they decide to place their capital elsewhere.
Additionally, the U.S. dollar offers a degree of stability amid international currency fluctuations. The dollar is the global reserve currency, suggesting less currency risk when buying U.S. real estate.
Portfolio diversity
The U.S. is a large country, with different real estate markets and submarkets and varied commercial real estate products. Each market and asset type are driven by unique fundamentals that can meet various goals and strategies, while offering risk management opportunities. Multiple product types amid many markets support portfolio diversification while improving the potential for higher returns.
Rule of law
The U.S. has a strong tradition of rule of law, providing legal protections that might not be available in other countries. Commercial real estate transactions and other actions are carried out fairly and ethically, with no hidden agendas or possible illegalities like bribery.
JLL’s 2022 Global Real Estate Transparency Index ranked the U.S. 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, which leads to well-informed decision-making and realistic expectations.
Investment safety in uncertain times
Because of international volatility, geopolitical conflict and inflation, foreign investors continue to regard U.S. real estate favorably. International investors have broadened their investment “scope”, looking beyond primary and gateway markets to secondary and tertiary locations, as well as looking beyond the “major food groups” to other property sectors that are expected to benefit from both secular and cyclical changes. We anticipate continued strong interest in U.S. real estate from foreign investors, given this country’s general ability to bounce back from periods of economic instability.
Paul Jackson serves as managing partner at Accord Group, based in London.