Commercial real estate in the U.S. has always been—and likely will always be—open to foreign investors. In some cases, however, the federal government believes foreign ownership’s details are not transparent enough, at least when foreign entities end up owning buildings where federal agencies conduct high-security affairs and handle sensitive information.
On May 16, three ranking members of the Senate Finance, Homeland Security, Government Affairs and Banking, Housing and Urban Affairs committees raised concerns about how the Committee on Foreign Investment in the United States (CFIUS) reviews pending real estate transactions. In a joint letter to the Government Accountability Office (GAO), Senators Ron Wyden (D-OR), Claire McCaskill (D-Mo.) and Sherrod Brown (D-Ohio) asked the agency to review the CFIUS approach, citing growing questions about how national security could be impacted by certain real estate transactions.
On the same day that the senators sent the letter, Rep. Stephen Lynch (D-Mass.), introduced legislation requiring that foreign property owners reveal beneficial ownership whenever a federal agency leases high-security space from a private landlord for classified operations or to store sensitive data. In wording that fully expressed Lynch’s concerns, the bill is called the “Secure Government Buildings from Espionage Act of 2017.”
The moves come as news feeds bring new revelations—almost on a daily basis—of large-scale cyber attacks and investigations unfold into national elections compromised by outside forces.
Concerns have also been raised about foreign investors potentially using profits from U.S. real estate investment to fund terrorist organizations and criminal activities. In mid-June, the United Arab Emirates ambassador to Washington Yousef Al Otaiba accused the government of Qatar of using money brought in by the Qatar Investment Authority to support Hamas, the Muslim Brotherhood and groups with links to al Qaeda. In the first quarter of 2017, Qatar invested in 16 properties in the U.S., for a total of $1.9 billion, according to Real Capital Analytics (RCA), a New York City-based research firm. The country ranked 11th out of 25 on the list of top foreign buyers of U.S. commercial real estate, and this has been a slow quarter as Qatar’s acquisition volume was down 65 percent year-over-year.
Now lawmakers want to increase due diligence on real estate transactions executed by foreign owners.
The increased scrutiny comes on the heels of a strong year for foreign investment in 2016, when the office sector attracted a high volume of offshore capital, according to research from real estate services firm JLL. In 2016, foreign office investment exceeded $20 billion and accounted for 16 percent of overall acquisition activity for the second consecutive year, according to JLL’s “Office Investment Outlook,” for the fourth quarter of 2016, the most recent available.
“With the increase of foreign investments it is a question of … the transparency of the owners,” says Anne Salladin, a special counsel at Strook & Stroock & Lavan, an international law firm based in New York City. “It is just making sure the government has the correct information.”
The question is: could the closer scrutiny slow down an active part of the market?
Federal agencies appear to have reason for concern. In a letter of support for the Secure Government Buildings Act, directors for the FACT Coalition noted that at least 20 office spaces and facilities leased by the Government Services Administration had foreign owners, citing a GAO analysis published in January.
Most of the foreign landlords on the GAO list are based in countries that are strong allies of the U.S., including Germany, the United Kingdom and Israel. For instance, Winnipeg, Canada-based Artis REIT leases 210,202 sq. ft. of space to the Federal Bureau of Investigations in a building in Phoenix. Also, Korea Investment Holdings leases 862,292 sq. ft. of space in a building on Market Street in Philadelphia to the Internal Revenue Service, the Inspector General for Tax Administration and the Department of Homeland Security. The company is based in South Korea.
So where is the cause for concern? The GAO analysis also notes that China-based Gaw Capital leases about 159,155 sq. ft. of space in a Seattle building to the Social Security Administration and the GAO itself.
China’s representation on the foreign landlords list was small, and in most cases the properties were jointly owned, according to the GAO’s analysis. But the Asian giant continues to be a major buyer of U.S. properties. In the first quarter alone, China invested in 515 U.S. properties, spending a total of $16.5 billion, according to the RCA—a 10 percent increase compared to the same period in 2016. It was the number one source of foreign capital flowing into U.S. commercial assets.
Middle Eastern countries, including Israel, Qatar, Saudi Arabia and Kuwait, jointly spent $7.5 billion on U.S. properties in the first quarter, with Saudi Arabia raising its investment volume by 2.5 percent year-over-year, to $1.8 billion, and Kuwait by 1.4 percent, to 1.0 billion.
Just as the profile of foreign buyers is shifting, so are ideas of what constitutes national security.
“It used to be about defense; then it was telecommunications,” says Chris Griner, a partner at Stroock & Stroock & Lavan, who had also worked in the office of general counsel for the Department of Defense. “Now it is critical infrastructure, and it could be banking, finance or medical. There are a whole bunch of things on top of that. There is no single definition of what is national security.”
Griner also co-authored a note on lawmakers’ efforts to increase scrutiny of commercial real estate transactions involving foreign owners.
It is unclear how much momentum is behind Lynch’s sponsored bill. Griner, however, is confident that increased transparency doesn’t necessarily bode ill for the sector.
“The U.S. is a great economy to invest in for real estate,” he said. “We see nothing that will slow things down.”