Foreign investors retreat from U.S. CRE

The Scotsman Guide - Victor Whitman - 26 May 2017

Until recently, foreign investors had been on a shopping spree for U.S. commercial assets. 

Chinese and Canadian companies purchased U.S. properties at a record pace in 2015. Among the biggest players were the Chinese company Anbang Insurance Group (which bought Manhattan’s landmark Waldorf Astoria hotel for $1.95 billion), and the Canadian investment company Brookfield Asset Management, which just spent$45.7 million on a research building in the Silicon Valley. Foreign money also has been a major factor in the explosion of asset prices in the major U.S. cities, which have risen far above the peak of the last boom.

In recent quarters, however, foreign investors have pulled back significantly from U.S. commercial property purchases. Deal volume for commercial properties is down generally for top-flight assets in the major cities. Foreign money has retreated to a far greater extent than U.S. investment activity.

This retrenchment by foreign investors began in the latter half of 2016 and has accelerated through the first quarters of this year. The high value of the U.S. dollar has made hit harder on foreigners to acquire properties. Uncertainty surrounding President Donald Trump’s tax overhaul is cited as another factor. Most analysts, however, say the high prices for U.S. assets is the single biggest cause of the pullback.

 “I think the whole thing started with the perceptions that, particularly in some of our major gateway cities, real estate was starting to look pretty fully priced,” said Bob O’Brien, Deloitte’s global and U.S. real estate and construction sector leader.

Analysts also are quick to point out that it would be a mistake to suggest that foreigners are pulling out of the market altogether.

“Investment volume in calendar 2015 hit an astronomically high level and not what I would consider would be a sustainable level,” O’Brien told Scotsman Guide News. “So, it created an investment environment in 2015 that was just off-the-charts strong. The pullback is somewhat natural.”

O’Brien noted that if prices do come down, “there is a lot of capital out there waiting to step right in, if they can buy things at a value.”  

By the numbers

Asset prices have not fallen yet, however. Recent sales-transaction data suggests that investor activity has come back to earth.

In the four quarters that ended March 31, foreign investment in U.S. commercial real estate totaled $66.7 billion, Real Capital Analytics said. That is down 33 percent from the full-year 2015, which was the high-water mark for foreign investment. By contrast, investment by U.S. investors has dropped only 8 percent from the 2015-year peak.

It would be a mistake to say that foreigners have pulled out, however. Investment remains “elevated” compared to historical trends, RCA said. Foreign money represented about 14 percent of the total deal volume in the four quarters through March, which is down from 18 percent in 2015.

“You are at the top of the cycle in terms of prices,” RCA Senior Vice President Jim Costello said. “And if you are going to go in and buy something now, it is not the slam dunk it was two or three years ago, when you could paper over any challenges you might have had on the underwriting. So, it is just a trickier environment to operate in. Buyers and sellers are little more farther apart naturally.”

Chinese and Canadian investors remain the dominant sources of foreign capital, together accounting for $31.6 billion, or 44 percent, of all the acquisition volume in U.S. commercial real estate in the four quarters to March 31, RCA said. The next closest country was Germany at $5.6 billion.

Foreigners are still most active in America’s six gateway cities. Manhattan is far the leader, followed by San Francisco and Los Angeles. Foreign buyers are also fanning out into roughly 20 other major cities, where assets are more reasonably priced and the yields are often higher.

Miami has long been a source of foreign capital from South America.  Alan Lips, a partner with the Miami-based consulting firm Gerson Preston, said Miami has seen the pullback in foreign investment, although it is much more pronounced in the condo market than commercial real estate assets. He said most commercial deals in the city involve some foreign money.

“I am seeing clients put together massive commercial deals still,” Lips said. “If you look at the entire corridor north of downtown, everything is active, under development. There is definitely a buzz in the air of a slowdown, be cautious, buy right, all those things. Then, there is a lot of development that is slated to begin in the near term, whether it is in the next year, near term, two years or three years. There is definitely activity going on here.”