Foreign Capital Flows into U.S. Real Estate: What Makes USA CRE So Attractive to Global Investors?
By Jack Berquist, Managing Partner, San Francisco, Accord Group.
This past year has been an incredible time for commercial real estate. Despite the continued economic uncertainty resulting from the pandemic and other geopolitical factors, we have seen a steady rebound and growth in transaction volume and deal size.
One key element of this rebound has been the enthusiastic return of foreign capital to
the U.S. market.
Foreign pension plans, sovereign wealth funds, and other offshore institutions purchased $70.8 billion of U.S. commercial real estate in 2021, data firm Real Capital Analytics (RCA) notes in their latest US Cross-Border Investment Compendium. That was the highest total since the $94.6 billion invested in 2018, and nearly double the 2020 figure. According to the National Association of Realtors, the largest sources of cross-border capital came from Canada and Asia.
So, what makes U.S. commercial real estate so attractive to foreign investors?
There are a variety of advantages to investing in real estate in the United States:
The U.S. offers a wide selection of real estate markets and assets from which investors can choose. Each market and asset type provides its own unique attributes, opportunities, and risks for investors to consider. This wide selection can help meet the investment criteria of a wide range of investors and provides ample opportunity for investors to create a diverse portfolio, further maximizing their return potential.
The U.S. market is managing well through the economic downturn resulting from the pandemic, and the increase in employment opportunities and growing business sector help to create an element of stability relative to other regions. The market contrasts favorably with regions such as Europe, where the economic turmoil caused by Brexit has discouraged many investors, or China, where a real estate crisis has been unfolding for the last year. Additionally, because the U.S. Dollar is the global reserve currency, there is arguably less currency risk involved in investing in U.S.-based real estate.
The U.S. has a strong, transparent rule of law, with many legal protections not always found in other countries. In fact, JLL’s Global Real Estate Transparency Index, which ranks real estate transparency by market based on a combination of quantitative market data and survey results across 99 countries and territories, determined that the U.S. was the 2nd most transparent market for real estate. This transparency is enticing for foreign investors, as it offers a sense of security that they may not be able to enjoy in their own countries.
U.S. commercial real estate offers the potential for higher returns relative to the capitalization rates in Europe and parts of Asia. Additionally, the U.S. market is known for its scale and liquidity, providing foreign investors the flexibility to exit and pivot their investments if they decide to invest their capital elsewhere.
These factors all create a strong environment for foreign investors to feel confident in the U.S. real estate market and where they are placing their capital.
But which assets are most attractive to foreign investors?
Prior to the pandemic, foreign buyers focused predominantly on office buildings and hotels in major markets. According to RCA, in 2021, similar to domestic investors, foreign capital pivoted toward:
The industrial sector has become the most popular for foreign investors and accounted for 34% of cross-border capital. Foreign investors have recognized the strong fundamentals of this sector and the continued shift toward larger-scale domestic distribution.
Multifamily assets came in second to industrial at 30% of all capital invested from foreign entities into US commercial real estate. Although foreign investors have usually targeted this sector significantly less than domestic investors, rising rental rates and limited supply have helped contribute to an increase in foreign investor demand.
While industrial and multifamily performed better than in previous years, the RCA study also notes that the retail sector made the most significant downward shift, falling from 17% of foreign capital investment prior to the pandemic to under 5%. While many domestic investors have begun to reinvest in this sector, foreign investors have proved to be more hesitant.
Very notably, office located in CBDs, which has historically been a favorite of international investors, has dropped from the pre-pandemic average of 25% (of foreign capital investment) to 18%. While offices have traditionally provided stable returns, the hybrid and remote work schedules that have resulted due to the pandemic have made these assets less reliable investments at this time.
In addition to a shift in targeted asset types, foreign investors also shifted their focus to secondary markets over gateway cities, with Seattle, Atlanta, and Dallas emerging as top investment markets. In 2021, these markets all outranked Manhattan, the previous leader, as the top destinations for foreign investors.
Overall, the U.S. market is a consistent leader in the global commercial real estate space and has shown the ability to bounce back from periods of instability. Foreign investors are increasingly recognizing the immense opportunity offered by the U.S. commercial real estate market, and not only are they investing in large numbers, but they are also investing in new ways by making the leap into different asset classes and emerging submarkets.
At Accord Group, we have a deep history of success with a vast network of primarily institutional, international capital partners. We have completed more than $12.7 billion in capital transactions and our partners have collectively raised more than $29.7 billion to date, with a majority of these as cross-border transactions.
Our global perspective and footprint supports our work with our partners across the globe. We provide strategic investment management and capital advisory services, supporting our clients and investor relationships as they continue to navigate the global commercial real estate market.