International investment is keeping the real estate market competitive in the U.S.
First American news LLC, Raleigh NC: Foreign investment in U.S. commercial property surpassed pre-pandemic levels last year, as overseas investors piled back in after travel restrictions eased and the U.S. economy bounced back.
Pensions, sovereign-wealth funds, and other foreign institutions purchased $70.8 billion of U.S. commercial real estate in 2021, according to data firm Real Capital Analytics. That was the highest total since the $94.6 billion invested in 2018, and nearly double the 2020 figure.
What countries are investing in the U.S.
Investors from Canada, Singapore, South Korea, the U.K., and other countries joined U.S. domestic investors to drive last year’s total commercial real-estate sales to record levels.
Before the pandemic, foreign buyers tended to focus on office buildings and hotels in major cities such as New York, San Francisco, and Chicago. In 2021, overseas money largely followed U.S. investors into hot sectors such as warehouses, rental apartments and specialized office buildings for pharmaceutical businesses.
These segments produced yields that have far outstripped bonds in the global low-rate environment. The U.S. economy, meanwhile, has recovered faster than others, attracting cross-border investment to a range of businesses as well as commercial property.
Foreign investors also favored the Sunbelt and smaller markets over their traditional stomping grounds in coastal U.S. cities. Last year a record 64% of foreign investments were in properties in nonmajor metropolitan markets, according to Real Capital, up from about 53% in 2019.
“It is a different world,” said Gaby Mendoza, CEO of One West Realty International. “You’re starting to see big institutional investors looking at Dallas, Charlotte, Denver, Nashville, Austin and other high-growth, low-tax markets.”
Many foreign investors expect to maintain last year’s investment levels or even increase their buying in 2022 through direct acquisitions or U.S.-focused private-equity funds, according to overseas investors and real-estate brokers. Their appetite remains strong for logistics and rental apartments as well as the highest-quality office buildings that have seen the most leasing during the pandemic, these people said.
Nearly all overseas investors, like domestic investors, stayed out of the market during the early months of the pandemic. That created a backlog at many foreign institutions that have been allocating more capital to real estate in recent years, according to market participants. They have been under pressure to put that capital to work to hit their hoped-for returns.
As the U.S. economy recovered, many cross-border investors felt a need to get their allocation of capital out, said Mark Chu, co-head of the Asia-Pacific region for real-estate investment bank Eastdil Secured.
Foreign investors with offices in the U.S. were able to resume making deals before others because they weren’t limited by international travel restrictions. For example, Bahrain-based Investcorp, which has a New York office with a real-estate staff of about 25, restarted its acquisition strategy in mid-2020.
Investcorp purchased about $1 billion in property in 2020 and $2.5 billion last year, mostly industrial and multifamily property in Sunbelt markets. “We got out there,” said Michael O’Brien, Investcorp’s co-head of North American real estate.
After buying no U.S. real estate in 2020, Commerz Real resumed investing last year with its $850 million purchase of the Manhattan office tower at 100 Pearl St. Because of travel restrictions, the real-asset investment business of Germany’s Commerzbank AG focused primarily on its home market during the first year of the pandemic, according to Maja Procz, Commerz Real’s global head of transactions.
But that put a hold on Commerz Real’s strategy to increase its U.S. holdings. “As soon as [travel] became possible in the early summer last year, we started our international activities,” Ms. Procz said.
Commerz Real plans to open its first U.S. office in New York later this year and is considering expanding its U.S. portfolio—which now consists of office, hotel, and retail assets—to include rental apartments, as well.
“As soon as we have the office on the ground, we will have many more possibilities,” Ms. Procz said.