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Canadian Investors Love U.S. Office Assets, but Decline Expected in Late 2015

A surge in Asian investment in the U.S. office sector in the first quarter overshadowed the one country responsible for one quarter of all cross-border acquisitions in the U.S.: Canada.

While total investment in U.S. commercial real estate by Asian countries totaled $7 billion in 2014, Canada by itself was responsible for $9.7 billion, with almost half of that money spent on office properties. Most foreign firms seek out U.S. real estate for the same reasons—transparency, ease of diversification and an improved economy,—but Canada also has a front-row seat to opportunities.

However, Asian firms are catching up. Canadian investors have acquired $3.7 billion in U.S. office assets so far this year, or 24 percent of the total foreign investment in the office sector. China alone has closed $1.2 billion in transactions, mostly in Manhattan, and Hong Kong investors will close about $776 million in the first half of the year, including the Columbia Center in Seattle, according to Jeanette I. Rice, Americas head of investment research for CBRE.

Rice says Canadian and Asian investors’ interest in U.S. office assets is similar in that both are looking for favorable long-term returns and very large assets. However, Canadian investments are more diversified by size and product type, partly due to the diversity of investor types and a deeper knowledge of the U.S. property market. There is less coastal/gateway bias by the Canadian investors, Rice notes. In addition to New York City transactions, Canadian investors this year have acquired office buildings in Phoenix, San Francisco, Denver, Fort Lauderdale, Fla., Atlanta, Hawaiian markets, Chicago, Boston and Dallas.

“Will Asia supplant Canada in the office investment arena? Collectively yes, it’s likely, with the largest growth coming from Chinese investment in our learned opinion, and over the longer term, I predict that Asian capital will diversify more across U.S. markets,” Rice says. “But Canada will continue to play a major role in office investment. Canadian pension plans, in particular, are among the largest investors in global real estate, and they are growing and will continue to be looking for real estate opportunities. While much of their investment growth will be beyond North America, the U.S. remains attractive to them.”

Richard Jankowski, a managing director with commercial real estate services firm Avison Young, says the steady but slow economy in Canada doesn’t provide as much risk-reward as some volatile, fast-paced U.S. markets. Falling oil prices have also hurt the western portion of the country, he says. “The oil industry drop happened faster than anyone predicted, and that’s led to a cooling of investment in the country, though the office sector has suffered the least hit,” Jankowski says.

Dan Rogers, vice president of capital markets with real estate services provider DTZ, says the limited supply of real estate investment product in Canada, a nation of only 35 million people, has forced Canadian investors to seek product elsewhere. As the U.S. was more negatively impacted by the credit crisis in 2008, it also experienced a longer recovery cycle. During this recovery Canadian investment firms, in their search for yield, realized opportunities were abundant in the States, with yields that were 100-200 basis points higher than for similar product in Canada, he says.

One hiccup, however, may be the renewed currency imbalance between the countries. The Canadian dollar that had been worth about $0.60 for decades doubled in value compared to the U.S. dollar during the recession, but has since returned to $0.80, which could shrink outgoing capital.

“Canadian investors can easily access sites across the border, and products can be analyzed and underwritten within a short period of time,” says Rogers. “Limited investment power in the U.S. allowed Canadian firms to compete for and purchase recovering U.S. real estate product. The historically high Canadian dollar also provided a significant advantage to Canadian investment firms. However, with the recent decline in the Canadian dollar, investment in the U.S. may in turn decline.”

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