In commercial real estate investing, institutional money generated from U.S. investors typically reigns as the top financing source. But taking a step back to look at the entire market, today’s capital flow has started to shift from inside the U.S. to overseas.
The U.S. commercial real estate market has always been attractive because it is large, liquid and believed to be a safe shelter for long-term investments. For several years, deep-pocketed foreign investors have been strategically investing in U.S. commercial real estate, but recently they have truly become a major player in this space, particularly in gateway regions like New York, Southern California and South Florida. Global direct investment in U.S. real estate increased to $41 billion in 2014 alone, which represents almost 11 percent of all investment in American real estate land assets.
They come from around the world, though recently Russian and South American investors have really started to emerge. Miami, for instance, has been the beneficiary of investors from Central and South America because of those regions’ proximity. They bear a similar profile to the typical U.S. sponsor: successful, high-net-worth individuals—or groups of individuals—who are either self-made entrepreneurs or come from wealthy families. And just like their American counterparts, global-based investors are looking for the same thing—attractive, income-producing investment opportunities with strong risk-adjusted returns—and have long realized that the U.S. is the best place to uncover these opportunities.
There are many issues fueling this trend, but likely the main factor is the fact that these investors are facing the potential of a devaluation of their own home country currencies. They want to protect their liquidity by putting their money into a stable economic environment with favorable tax implications, and U.S.-based commercial real estate fits the bill.
It’s no secret that the panache and stature associated with being the owner of a property in the United States carries its own weight to these investors. What’s also interesting to note is that they are not necessarily concerned about some of the other factors that keep the typical U.S.-based commercial real estate investor up at night, such as cap rates. Foreign investors’ main concern is simply the yield their investments will produce.
Sector-wise, the typical play for foreign investors is to place their capital into retail, including shopping centers and malls, as well as office properties, though some are diverging into other property types, including hotel and multifamily assets. The hospitality sector has the added bonus of also providing a place for the investor to reside whenever stateside. And while core class-A assets make up a good portion of their investment choices, it’s not just about owning trophy assets—the small-to-midsize business assets are proving to be just as attractive to foreign buyers. It’s about owning a slice of the U.S. commercial real estate pie, no matter how big. And while the rules of the Foreign Investment in Real Property Tax Act of 1980 and Europe’s Alternative Fund Managers Directive may dampen some cross-border investment activity, the spigot seems to remain fully open.
This trend of around-the-globe investment dollars being pumped into the U.S. has had a strong impact on both the real estate scene and the country’s overall economy, and that impact will continue as foreign investors significantly increase their overseas positions throughout 2015 and beyond. Organizations with recognized global brands and locations abroad are in the driver’s seat to make the most of this opportunity.
Obie Walli is co-founder and CEO of Coldwell Banker Commercial (CBC) Alliance, based in New York City.