During the recession, foreign investment into U.S. commercial real estate (not unexpectedly) fell dramatically. Today, we are seeing a material rebound of cross-border investment dollars into real estate, with Asia, in particular, significantly increasing its overseas positions.
Though Asian real-estate investment has not surpassed its 2007 pre-recession height, research from Real Capital Analytics shows that, to date, 2014 Asian cross-border real estate investment has already reached 88 percent of the total in 2013.
Why is the level of Asian capital into U.S. commercial real estate recovering so aggressively? Two primary reasons are:
1.There is too much capital chasing few investment opportunities; this is the case for all asset classes, including real estate, stocks and bonds.
2.Real estate has become a particularly enticing investment alternative globally as investors search for yield in relation to risk. While the U.K. has been a favorite market for Asian capital, the U.S. is rapidly catching up.
Why Chinese money is flooding American markets
There are many contributing factors to the growth of Asian capital investment in the United States, such as the overall improvement of the U.S. economy and relative transparency of the U.S.'s political and monetary policies compared with certain Asian markets. The U.S. is on the forefront of a broader economic recovery, whereas, arguably, other regions across the globe are still struggling.
In Asia, for example, the starkest example of fundamental issues with supply and demand dynamics is the boom of so-called "ghost cities" in China, where construction has far outpaced the general population's ability to absorb real estate. As a result, China finds itself with massive residential complexes that are not occupied, though they have been sold — not as a place to live but as speculative investments for an emerging middle class.
In key Asian cities such as Singapore, Hong Kong, Beijing and Taipei, real-estate prices are extremely high by comparison to some of the U.S.'s best markets, including New York and San Francisco. Might there be a real estate bubble forming in these key Asian markets? There is certainly talk of it. And many parts of Asia continue to face political challenges, which create unpredictability.
Los Angeles housing market loses star status
The result? A lot of capital trying to find a home in the U.S.
Post-recession, there are several things that foreign investors are doing differently:
1.Taking on less debt leverage and planning on longer-term investment strategies.
2.Being extremely selective about markets, staying close to major "gateway" cities (in the real estate industry, we call those the "Sexy Six") and to markets they know well or in which they already have a presence.
3.More often putting boots on the ground within each market to ensure local expertise and a much closer pulse on the transaction (in contrast to the past, when these investors may have been operating from abroad or through local operating partners).
The "Sexy Six" represents the top coastal markets for real estate investment in the U.S.: New York, Washington, D.C., L.A., Boston, Seattle and San Francisco. Among those, Asian attention toward markets such as Seattle has increased dramatically, drawn there because of the presence of Amazon, Costco, Microsoft, Boeing,Starbucks, etc.—the same caliber of companies that fueled the growth of Silicon Valley and San Francisco 10 years ago.
What the future holds
Capital flows from Asia to the U.S. should continue to rise in 2015, showing positive signs of a growth stage; while the flow of capital has been directed to the most prominent markets such as New York, Los Angeles and San Francisco, it is likely that other markets will receive increased attention, including Houston, Dallas, Denver and Chicago. Asian investors are very keen on multifamily real-estate options because it's an area they know very well; it's a sector we can expect to maintain popularity. But office and retail remain challenging for foreign investors because they are competing with major U.S.-based investors all looking for the same thing: a trophy location, which is difficult to find. That leaves industrial, which may very well be a growth area to watch — with stable risk and return metrics, it traditionally is very low risk. And since foreign investors are looking for the longer-term strategies in real estate, it would be reasonable to expect industrial properties to become increasingly popular.
Overall, we should enjoy the growing post-recovery economy while keeping a careful eye on the factors supporting it and the return of foreign investment. One quick example: how the end of the U.S. Federal Reserve's quantitative-easing program will impact the overall market.
Commentary by Brian Ward, president, Capital Markets, Americas for Colliers International, which specializes in commercial real-estate services. He oversees Colliers' investment sales, debt and equity service lines for Canada, Latin America and the United States.
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