What you need to know about cross-border capital flocking to U.S. real estate

Amanda Maher
Amanda Maher | 9 min. read

Published on August 18, 2016

Those who follow real estate markets closely are probably well aware that foreign capital has been pouring into the United States over the last few years.

Most references to the trend are general. For the first time, Buildium has compiled a comprehensive guide to help our readers better understand the flow of foreign capital in U.S. real estate: What’s causing the trend? Who’s investing? In what product types, and where?

Why Are Foreign Investors Buying U.S. Real Estate?

A number of factors are influencing foreign investment in U.S. real estate.

First and foremost is the global economic slowdown. The collapse of crude oil from over $100 a barrel to less than $50 a barrel in January 2015 had a tremendous impact on oil-producing countries like Canada, Mexico, Brazil, Venezuela and Russia where many foreign buyers originate. As these foreign economies have slowed, currencies have been devalued compared to the U.S. dollar.

Initially, some might assume that the strength of the U.S. dollar would dissuade foreign investors as their purchasing power wanes. However, the recent extreme volatility in global markets and stability of the U.S. housing market (and the U.S. economy overall) has actually had the opposite effect—more foreign investors see the U.S. real estate as a safe haven for their capital amid global uncertainties. The U.S. housing market has produced an average 3% return per year for the past several years, which is particularly attractive to foreign investors whose domestic economies are contracting.

Related, a number of events have led to political instability in many foreign countries. Most recently, Brexit has investors on edge. Turmoil in Japan, Greece and Turkey has also shaken investors’ confidence in the global markets. The European Central Bank, Danish National Bank, Swiss National Bank and Bank of Japan have all slashed deposit rates—so many foreign investors have pulled their money out of these banking systems altogether. A significant portion of that capital has landed in U.S. real estate. An unintended consequence of this capital flight is that foreign currencies become even more depressed—creating a reinforcing cycle that only makes U.S. real estate that much more attractive.

Who is Investing in U.S. Real Estate?

According to an analysis by Real Capital Analytics (RCA), a real estate data and advisory firm based in New York, the majority of foreign capital is coming from Canada. Canadian investors spent more than $27.5 billion on real estate last year, and are behind a number of signature deals like the $5.3 billion purchase of Manhattan’s Stuyvesant Town (a joint venture between the Blackstone Group and Canada’s Ivanhoe Cambridge, Inc.). Canada has long dominated cross-border capital in U.S. commercial real estate. This is at least partially due to the fact that the Canadian institutional real estate investment market is dominated by a very few, very large players and institutional-quality assets rarely trade on the open market. As a result, Canadian investors look to the U.S., where the investment landscape is estimated to be 15 times larger than the Canadian real estate market.

Asian investors were the second most active cross-border investors in 2015. Despite the spotlight on Chinese investors, it was actually Singapore that led the way, investing more than $22 billion last year. However, the bulk of capital originating in Singapore poured into industrial assets (more on that below). Behind Singapore is China, with just over $10 billion invested in U.S. commercial real estate.

An analysis of foreign capital investment in U.S. apartments only paints a slightly different picture. Here, we see that European investors surpass Canadian investors. Rounding out the top five are investors from Asia, the Middle East and Australia. A look back at investment over the past decade highlights not only the total growth of investment in the U.S. apartment sector, but also the recent uptick in capital coming from the Middle East.

How Much Real Estate Are Foreign Investors Buying?

RCA data finds that foreign buyers invested more than $91 billion in U.S. commercial assets last year, of which $19.6 billion was invested in apartment communities. A separate analysis, conducted by CoStar, reports lower total volume, estimating $69.4 billion was invested over the entirety of 2015, broken down as follows: Office ($23.9 billion), Industrial (18.0 billion), Multifamily ($9.85 billion), Hospitality ($8.0 billion), Retail ($6.8 billion) and Mixed-Use ($1.44 billion). No matter how the data is sliced and diced, a similar conclusion can be made: foreign investment sales have more than doubled over the past year.

Through June of this year, RCA estimates that international buyers have purchased $5.1 billion in apartment communities. This pales in comparison to investment activity in 2015. “This is a plateau,” says Jim Costello, a senior vice president with RCA. “Apartment investment is still up, but not as much as this time last year.”

Where Are Foreign Investors Buying Real Estate?

Institutional investors and large-scale foreign buyers are predominantly investing in primary markets like New York, San Francisco, Boston, Los Angeles, Chicago and Washington, D.C. Most institutional investors, whether domestic or foreign, look to buy real estate portfolios of at least $10 million, and primary markets offer the greatest concentration of these opportunities. Deals of that scale are much less common in secondary and tertiary markets (e.g. Charlotte, Ft. Lauderdale, Dallas, St. Louis).

Over the past year, a disproportionate volume (22%) of foreign money has been invested in New York City. The greatest volume of transactions included buyers from China, Germany, South Korea and Japan looking to own real estate in Manhattan. While Manhattan has always been a target for foreign investment, 2015 was an exceptional year: the borough attracted 199% more cross-border capital in 2015 than it did the previous year, for a total of $27.1 billion across asset classes.

Other popular markets include San Francisco/San Jose (7.6%), Los Angeles (5.1%), Chicago (4.7%), Boston (4.5%) and Washington, D.C. (4.2%).

A few noteworthy outliers: Phoenix attracted significant investment from Singapore; the Swiss invested in Portland, Oregon; and those from the UK looked to properties in Philadelphia.

Yet with so many foreign investors eyeing real estate in the primary markets, a record number of investors have set their sights on property in secondary markets. “Asian investors in particular are looking outside of the gateway markets for opportunities that can give them slightly more yield,” says Dan Cashdan, president of HHF Securities. “Some are hoping to take advantage of weakness in the energy sector by going after buying opportunities in markets such as Houston and Denver.”

Indeed, Denver ($720m) led secondary markets for total investment volume last year, followed by Philadelphia ($718m), Raleigh/Durham ($574m) and Houston ($526m). Foreign investors are more likely to invest in secondary markets that have strong college/university and medical infrastructure, as these “anchor” institutions provide a level of economic stability across market cycles.

What Types of Commercial Real Estate Are Foreign Investors Buying?

Over the past decade, anywhere from 40-50% of cross-border investment went into purchasing office buildings, primarily in the gateway markets referenced above. In 2008, office comprised as much as 65% of the properties purchased by foreign buyers. In 2015, office continued to lure investors—but for the first time in at least ten years, office attracted just 30% of cross-border capital. There are simply not enough high-quality assets to be traded, which has investors chasing yield elsewhere.

Suddenly, foreign buyers are investing in industrial buildings. Industrial, which typically attracts just 10% of foreign investment in any given year, attracted a staggering 30% of cross-border capital in 2015.

“Ownership of U.S. industrial properties is highly disaggregated; many small investors hold small portfolios,” explains Costello. “Foreign investors, even if they liked the U.S. industrial story (rising rents and demand created primarily by e-commerce), traditionally could not access the market easily, as it simply was not time efficient to buy buildings one or two at a time.” Now, with the supply of high-quality office assets dwindling, more investors are consolidating industrial assets to sell in portfolios that are appealing to foreign buyers.

Meanwhile, foreign investment in apartment buildings has remained steady at roughly 9% of total purchases in 2015.

How Do These Trends Affect Investors in Small- to Mid-Sized Multifamily Properties?

While markets across the U.S. have been a beneficiary of foreign investment in U.S. real estate, the bulk of investment in multifamily properties continues to be in primary markets like Boston, NYC and LA.

Accordingly, the uptick in cross-border capital has yet to have a drastic impact on demand for small- and medium-sized multifamily properties in secondary and tertiary markets. That said, competition from foreign buyers has caused many domestic investors to turn toward Class B/C properties in primary markets where high demand for rental housing and restricted supply had reduced spreads between Class A and Class B/C multifamily buildings. Many domestic investors are also looking to purchase larger, Class A properties in secondary and tertiary markets.

In sum, foreign investors are certainly impacting the U.S. real estate market, but much of the competition for small- and mid-sized apartment buildings is homegrown. Competition among domestic investors continues to heighten as traditionally large, institutional buyers in the U.S. are forced to look at other asset classes. “People are scanning outward,” says economist Ethan Vaisman. “Capital is finding its way into overflow markets,” where yields are higher and there’s more value-add opportunity.

At the end of the day, it is important for owners of small- and medium-sized multifamily portfolios to put all of this foreign investment in context: while cross-border capital has soared over the past year, it still represents just a fraction of total sales volume. According to RCA, apartment purchases made by foreign buyers increased from 5% in 2014 to 9% in 2015—but again, this represents just 9% of total apartment sales, and is only 2% higher than the number of sales made to foreign buyers back in 2011.

How long these trends last is anyone’s guess. The U.S. economy remains strong relative to global markets, and until there’s a notable slowdown, we suspect foreign investment will continue to pour into American real estate. Increased competition will make it harder for small- and mid-sized investors to add to their portfolios (particularly in primary markets), but will present an opportunity for investors looking to sell or diverse their portfolios into other investment vehicles.

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Amanda Maher

Amanda Maher is a self-proclaimed policy wonk who dabbles in real estate law. She holds a B.S. in Political Science and Sociology from Boston University, as well as a master's in Urban and Regional Policy from Northeastern.

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