Offshore CRE Investors Temper Outlook per Costar

APRIL 08, 2019|MARK HESCHMEYER

Overseas Buyers Temper US Property Outlook After Near-Record Year of Investment

Half Confident, While One-Third Sees US as Less Attractive, Industry Survey Finds

San Francisco reflects conflicted sentiment among foreign investors, ranking among the top five U.S. cities where they would like to both increase and reduce property holdings. Photo: Nathaniel Bernardo, flickr

Overseas buyers of U.S. commercial property are tempering their outlook after a near-record year of spending because of near-term risks such as an end of the recovery from the Great Recession, potential global political and policy disruptions and concerns related to climate change.

Foreign investors remain generally confident in a strong U.S. economy, solid real estate market fundamentals and further capital flowing to U.S. real estate, according to AFIRE, a fellowship for international real estate, in findings from its annual real estate investor survey. That dichotomy is playing out through split investor sentiment on New York and San Francisco, cities in the top five markets ranked for increased exposure and, at the same time, where investors would like to reduce holdings.

"There is good reason to believe, especially as the pricing for core assets is very high late in this economic recovery, that while many investors are aggressively pursuing investments in New York City and San Francisco, others may be exercising some restraint," said Gunnar Branson, chief executive of AFIRE, in a statement. "Both cities are also experiencing significant changes in neighborhoods and usage. In New York City, for example, there is a shifting of office values from the East Side to the West Side as Hudson Yards is completed. This kind of change can impact many investors’ portfolio strategies."

The survey captures the economic uncertainty in commercial real estate and other industries as U.S. economic growth approaches its longest stretch in history, which would occur in July. Executives in varying industries have been looking for indicators of an eventual slowing while trying not to be too conservative and miss out on any opportunities from further growth.

Foreign investors accounted for 13.4% of purchases in the fourth quarter of 2018 – the second-highest percentage ever – topped only by 14.9% in the first quarter of 2015, according to CoStar data. For the full year, foreign investors accounted for 9.2% of all acquisitions – again, the second-highest percentage, only behind 10.5% in 2015. Foreign spending surpassed $63.6 billion in 2018, $5 billion shy of what was spent in 2015.

"Commercial real estate continues to perform well and is an important part of any long-term investment portfolio strategy. As global institutions hold assets over an extended time horizon, often in excess of 10 years, they pay close attention to the factors driving growth in global cities as well as the risks, and prudently adjust their strategies accordingly," Branson said. "The fact that U.S. commercial real estate has attracted historically high levels of capital from institutions around the world in the last few years is a strong vote of confidence in the long-term performance of commercial property in U.S. cities."

About one-third of investors AFIRE surveyed indicated they found the United States a less attractive option this year. More than half had not changed their outlook, and 14% tagged it as a more attractive option.

Foreign investors remain generally confident in U.S. real estate but see risks ahead. Image: AFIRE

"The most common short-term concern cited by respondents was the increasing risk of a recession in this later stage" of economic growth, Branson said. "However, when talking about other risks, many pointed to higher interest rates as well as political and policy concerns. The Fed’s recent guidance may mitigate some concerns, but it’s too soon to tell for certain what kind of impact that will have."

When it comes to political and policy concerns, 78% of respondents expect that ongoing trade and tariff disputes between the U.S. government and other nations will affect cross-border investments in 2019 with rising uncertainty, changes in global capital flows and higher construction costs.

Those having a positive outlook overwhelmingly indicated confidence in strong economic conditions for investing in the United States, including among emerging niche markets and property types.

Real estate services firm Colliers International in its capital flow outlook for 2019 released last month also showed more willingness for foreign investors looking beyond their core markets for deals.

The nation's top six metropolitan areas account for 51% of offshore investors' activity, but that was down 11 percentage points last year. This trend demonstrates the growing willingness of foreign investors to consider secondary markets, which now accounts for 39% of offshore capital in U.S. property markets, up from less than 30% a decade ago, Colliers research showed.

Among AFIRE members, industrial and multifamily property sectors are still considered positive and were categories where respondents would most like to increase their exposure, with nearly 80 percent wanting to increase industrial exposure and 71 percent wanting to increase apartment holdings.