According to a recent CBRE report by CBRE, cross-border investment in U.S. real estate abroad was $6.5 billion in the second quarter of 2022, up 16 percent year-over-year.
Earlier this year, a survey conducted by the Association of Foreign Investors in Real Estate (AFIRE) reported that 76 percent of respondents plan to increase their real estate investments in the U.S. in 2022, while 82 percent said they will accelerate the expansion of their real estate investments in the U.S. over the next decade.
Commercial real estate is a very broad industry. Therefore, two issues to consider when discussing overseas investors investing in U.S. real estate are:
Different asset classes are at different stages of the real estate cycle.
The fundamentals differ from region to region and so do the needs.
Multi-family housing remains an attractive asset class for both domestic and overseas investors in the U.S. for the simple reason that people need a place to live.
The fundamentals affecting the U.S. apartment market include high home prices and rising mortgage rates. These factors, coupled with the fact that demand for single-family homes still exceeds supply, are causing potential buyers to wait and see what they can rent.
The occupancy rate for U.S. rental multifamily housing is 96% (considered "fully rented"), and demand and rent growth have expanded. According to CBRE, multifamily housing was the main area of cross-border real estate investment capital inflows in the second quarter, amounting to $3 billion.
There is no clear indication that this activity is declining, as 90 percent of respondents who are members of the Association of Foreign Investors in Real Estate (AFIRE) said they will increase their investments in U.S. multifamily residential products in the next three to five years.
Meanwhile, industrial real estate - particularly warehousing and last-mile distribution centers - is attracting the attention of domestic and foreign investors.
In the second quarter of 2022, the U.S. industrial real estate vacancy rate reached another record low, rents rose by double digits, and market absorption rates were at high levels. Despite the market turmoil of recent months, demand for industrial space continues, with domestic and international investors viewing the sector as a "must have" for their portfolios.
In terms of volume, overseas cross-border investment in U.S. industrial real estate totaled $2 billion in the second quarter, according to CBRE. Similar to multifamily investments, this trend is likely to continue.
Seventy-five percent of AFIRE survey respondents said they would like to add more U.S. industrial products to their portfolios in the next five years.
It should be noted, however, that there is growing interest in "alternative" real estate assets, including long term rentals, student housing, self-storage and other asset classes previously off the radar of Wall Street institutional investors, which have grown rapidly in recent years.
Long-term rentals, for example, began to evolve rapidly toward institutionalization before the epidemic, but the epidemic has changed people's lifestyles and accelerated the growth of the sector.
In addition, according to national real estate consulting firm John Burns, institutional commitments in this sector were about $3 billion in 2020, a figure that has soared to $30 billion in 2021.
Cumulative commitments are expected to reach $60 billion this year as larger institutional investors, homebuilders and operating agencies flood the market.
Another change in investment mindset is that foreign investors are increasingly embracing secondary and even tertiary markets in the U.S., rather than the previous narrow focus on U.S. gateway cities and urban cores.
According to Deloitte's report, Sunbelt cities including Austin and Dallas-Fort Worth, as well as Charlotte, Denver and Nashville, are attracting more investment interest, in part due to lower tax incentives. Other areas of overseas investment and interest include Atlanta, Phoenix and Seattle.
Deloitte also reports that gateway markets are attracting only 27 percent of overseas investment, with the rest of the capital flowing into other major regions and secondary and tertiary markets.
Deloitte and RCA's information was validated by AFIRE respondents, 71% of whom said they would increase their investments in U.S. secondary markets in the coming years. Meanwhile, only 32% said they would invest in major U.S. gateway cities during the same period.
None of the above analysis suggests that real estate investment in the U.S. is a slam dunk. A stronger dollar means higher costs for international direct investment and higher prices for hedging. Nonetheless, foreign investors are still looking to U.S. commercial real estate.
