Foreign Investors have Flocked back to US Real Estate with a $21 B Pot

Foreign investors made up for lost time during the epidemic by investing $21 billion in multifamily properties in the United States, pivoting their focus away from key coastal cities and toward the Sun Belt and second-tier areas.

Last year in 2021, international multifamily investments increased to 30%, up from 24% in 2019, while spending on office assets decreased to 14% from 27% in 2019.

Foreign investors are especially interested in student and senior housing, as well as the impact of climate change.

foreign investors- Property Type

Surge in the Multi-Family Investments

According to Deloitte, The US commercial real estate property sector saw a boom in investment activity in 2021, with volume increasing for 5 of the 6 quarters after the outbreak.

Despite continuing uncertainties about inflation levels, supply chain constraints, closure measures, and travel restrictions, last year’s total of approximately $809 billion1 in commercial properties topped the preceding year by over 80% and blasted past the previous record high in 2019 by 35%. 2

Increased confidences about income growth, combined with the asset class’s stable returns, has pushed the US real estate sector back to the forefront of investor appetites, at least domestically.

Yet, foreign investors purchasing real estate in the United States were absent from this rise for much of 2020 and early 2021. Prior to the second quarter of 2020, foreign investors could account for up to 20% of overall real estate investment activity or $100 billion per year.

As global investors shifted their focus back to domestic concerns during the peak of the pandemic, combined with evolving restrictions on international travel, volumes into the United States from abroad dried up to as little as 7% of total US real estate deal activity, a level not seen since the global financial crisis of 2007–2008.

The situation transformed in the second half of 2021 when travel restrictions were relaxed with the vaccination distribution and confidence about new growth patterns bloomed. Foreign investment increased by $53 billion in the second half, accounting for the vast bulk of the $69 billion annual total from 2021, the second-highest since data began in 2001

The situation transformed in the second half of 2021 when travel restrictions were relaxed with the vaccination distribution and confidence about new growth patterns bloomed. Foreign investment increased by $53 billion in the second half, accounting for the vast bulk of the $69 billion annual total from 2021, the second-highest since data began in 2001.

The early movers provided significant momentum to the return of international investment into the United States, and their initial asset and geographic concentrations signalled a shift in what foreign investors may pursue in the future.

foreign investors-Market Tier

BIG Players

One notable example was the German real estate fund Union Investment’s foray into the US apartment market late last year with a $227 million purchase of a two-building complex in Fort Lauderdale.

Union had previously invested in office buildings with long-term credit tenant leases, which were seen to be more secure for investors seeking consistent cash flow. According to Riaz Cassum, executive managing director, capital markets, and global head of international capital coverage for JLL, the fund was enticed by the multifamily property’s low capitalization rate and limited continuing capital requirements.

According to Matt Vance, senior director and Americas head of multifamily analysis for CBRE Econometric Advisors, there is more capital and dry powder in the world now, with the focus on investing in commercial real estate.

Industrial vs. Multifamily. The Choice

Foreign investors in the United States have a history of focusing on big assets such as CBD central business district offices, industrial, large regional malls, or luxury hotels, and adhering to a small number of primary markets with high liquidity. However, this is changing as investors seek multifamily, industrial, and specialty property types such as student housing and data centres.

Non-US investors are also shifting their focus from big metros to capitalize on the economic potential of emerging cities, particularly in the Southeast and Southwest. Foreign investors are relocating their capital to places they believe will perform well in the next cycle.

According to Marcus & Millichap, the percentage of foreign capital invested in the top six core markets (New York, San Francisco, Los Angeles, Chicago, Boston, and Washington D.C.) fell to 37.8 percent in the first half of 2021, down from 46.8 percent in 2019 and 57.9 percent in 2015. During that time, cities such as Seattle, Charlotte, Dallas, Atlanta, and Phoenix grew their market share.

According to Matt Vance, senior director and Americas head of multifamily analysis for CBRE Econometric Advisors, there is more capital and dry powder in the world now, with the focus on investing in commercial real estate.

International investors have moved their attention to U.S. multifamily constructions as a result of the asset class’s outstanding performance, particularly in secondary markets and suburban regions that are enjoying the most robust demand and rent growth.

Canadian investors have been especially active, typically being more familiar with smaller metros outside of the handful of higher-density gateway areas that have traditionally drawn the greatest attention from non-US investors.

Although multifamily development is now surpassing industrial growth, demand for industrial remains robust. Construction on warehousing alone increased by 40% in February 2022 compared to February 2021.

Furthermore, Dodge Data & Analytics predicts $53 billion in construction projects in the US warehouse and distribution centre market this year, accounting for more than one-third (36%) of the total US commercial construction sector this year. According to JLL, the United States will require 1 billion square feet of commercial real estate space over the next five years to meet e-commerce demand.

foreign investors

Who would win the BIG BRAWL?

The two real estate giant industries, Industrial and Multifamily have become the ‘apple of the eye’ for Global Investors.

Private equity has a strong belief in both the multifamily and industrial sectors, and it is investing in both sorts of projects. Both multifamily and industrial real estate demonstrated adaptability to the economic and sociological upheavals accelerated by the COVID-19 epidemic. Both experienced secondary market expansion and are being impacted by the increasingly important ESG movement. Labor shortages, surges in inflation, and supply chain disruptions are expected to persist, but so are high internal rates of return in many industries.

Given the strength of these two areas, investors may believe they cannot make a mistake. While only time will tell who wins the horse race, it will almost certainly be a photo finish.

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