The US commercial real estate debt markets will benefit from a broader influx of international capital to projects in major cities and markets, despite a series of headwinds ranging from a rising interest rate environment and volatility in the banking system, according to the Association for International Real Estate Investors.
The Chicago-based trade group represents foreign investors in real estate, and said in its first-quarter survey that international investors continue to see the US as a preferred destination relative to Europe. AFIRE found that these investors are planning to increase their allocation in the US by 6 percent over the next year. Conversely, allocation to the European market declined 5 percent over the same period.
Gunnar Branson, chief executive at AFIRE, told Real Estate Capital USA that the data shows “there is strong confidence in US property markets expressed by non-US investors,” adding that a lot of interest in investing in the US has grown in the debt market because of the demand increase.
He continued: “We talked about the challenges of the US property markets and [that] of the US economy at this point in the cycle. In some ways, real estate investors may perceive the US to be less challenging than other advanced economies around the world.”
On the plus side
In addition to the depth of US real estate markets and the dollar being the reserve currency globally, the US market has a “relative political stability compared to perhaps other years [and] other countries,” Branson said. “When you think about the US, it’s such a large market, you have so many global cities with large portfolios of commercial real estate available.”
The report shows New York once again topped the list as the most popular US city for investment, with Boston, Atlanta, Washington and Austin also showing strength.
“Markets that are continuing to be favored by international investors range from larger markets like New York to mid-size Atlanta or Washington DC, with continuing interest in some secondary markets like Austin or Nashville,” said Branson.
In terms of property type, 94 percent of both non-US and US investors saw multifamily and industrial as the most attractive asset classes. There’s also a sentiment differentiation that US-based investors hold a stronger optimism of the hospitality sector, with 64 percent seeing the property type attractive, while 25 percent of non-US investors showed a similar inclination.
Here to stay
International commercial real estate investors are paying more attention to trends that “don’t go away” in a continuingly volatile, post-pandemic era, including the impact of uncertainty over energy costs, and central banks moving to control inflation.
Charlie Smith, managing director of geopolitical strategy consulting for Newmark’s Global Corporate Services Practice told Real Estate Capital USA that one impact of the Russia-Ukraine war is an energy transition that has affected Europe’s economic landscape most profoundly. It has also strengthened the ESG considerations in the real estate market.
“Europe saw a shock in energy prices, which really accelerated its timeline towards energy transition, and was, ultimately, a good thing,” said Smith.
This has meant greater thoughtfulness around ESG today, particularly for higher-valued assets. “Do you have energy security? Do you have renewable energy or energy efficiency built into what you have?” said Smith, citing questions investors consider when making ESG-related risk assumptions for their portfolios.
The pandemic and the geopolitical conflicts had a “transformative effect” that forced investors to think about things in a different way, and to understand that the world is a very different place, Smith said.
“From a corporate services standpoint, we think about those questions in terms of risks, though it’s also important to think about opportunities,” he said, “and the green energy example in Europe is a perfect microcosm of risk and opportunity with an obvious recent downside, but an enormous long-term upside.”
AFIRE’s Branson also echoed the green transition in the European markets, noting Germany is making concrete steps towards energy independence. “In other words, they are getting ahead in the race to a more sustainable economy,” Branson said.
According to AFIRE’s first-quarter survey, 86 percent of global investors don’t agree that climate risks have been appropriately reflected in real estate valuations. This highlights a possible blind spot the market is yet to see.
However, Branson believes there is an emerging positive sense that investors value the potential long-term returns made by such transitions. “There is a growing agreement that if you are better at understanding sustainability and investing accordingly, [and] if you’re better at understanding the social picture and the impact it has in your investments, [then] over time, you will see better risk adjusted returns.”
Other cross-border trends
Smith suggested global investors are taking long-term US government policy into account as a tool to reduce uncertainty. “Industrial policy and advanced manufacturing policy has been returning to an era where the government could dictate more terms about what the economy should or shouldn’t be doing,” Smith said, adding regulations like the Inflation Reduction Act and Chips Act are unneglectable factors in the background.
“Given their ongoing growth and reliability in the current landscape, it is a safe bet to double down on certain areas like semiconductors, electric vehicles, and batteries,” said Smith, also highlighting the significant growth of industrial and logistics real estate investment within the US market.
When it comes to other real estate capital that flows across borders, Smith highlighted international investors’ nearshoring in some neighboring countries of the US. As these countries share a free trade agreement with the US, international investors might opt for the markets there to avoid potential policy hassle and profit from its backdoor position to the US.
For example, while there is more uncertainty for Chinese investors to enter the US due to the contentious US-China trading relationship, Smith pointed out that markets in Canada and Mexico are the next stops that specifically attracted Chinese investors.
“Chinese investment into industrial real estate and manufacturing has been significant in Mexico,” said Smith. In 2021, net investment from China (including Hong Kong) into Mexico was around $500 million. China is now Mexico’s second largest import partner after the US, per the Mexico Secretariat of Economy.”
“Companies are more willing now to pay a bit more for supply chain security, rather than just going for lowest cost,” Smith said, explaining that the pandemic’s disruption has encouraged a rise in nearshoring.