Commercial real estate financing has been expanding rapidly in the face of historic rates of foreign acquisition. But it appears many foreigners may have lost interest in the US commercial real estate market this year.
Foreign commercial real estate acquisitions in the US are down from their record highs in 2015. Chinese and Canadian investors have been particularly active in US commercial real estate. Both groups accounted for 44 percent of all US commercial real-estate acquisition by volume in the 4 quarters preceding March 31st of this year.
But this year has seen some pull back on the part of foreign investors. Foreign Investment in commercial real estate has declined at far greater pace than investment by US citizens. In the four quarters leading up to March 31st, the rate of foreign investment fell by 33 percent when compared to 2015. Investment by US citizens in commercial real-estate fell by just eight percent over the same period. Analysts give many reasons for this apparent decline in the purchase of commercial real estate by foreign investors.
The rate of foreign investment is perhaps being hampered by a particularly strong US dollar. Other reasons may include political uncertainty, in particular with regard to the Trump administrations tax reform agenda. But the consensus among many analysts appears to be that real-estate assets particularly in traditional gateway markets like New York or San Fransisco are simply overpriced. Bob O’Brien, Deloitte’s global and U.S. real estate and construction sector leader, claims that the decline started with the perception that, “particularly in some of our major gateway cities, real estate was starting to look pretty fully priced.” In essence the record pace of foreign investment in 2015 may have pushed prices in certain real estate markets to unsustainable highs.
US Commercial real-estate remains strong. New deals and the rate of commercial real estate financing will more than likely stabilize from the record highs of previous years.
The question is what fueled the record rates of commercial acquisitions by foreign investors in the first place? Brexit and other factors supported the perception of global instability from 2015 to 2016 , which made US real estate seem particularly attractive. There were also concerns (which still remain) of a debt bubble in Chinas real-estate market which fueled real estate acquisitions by Chinese citizens. The first half of 2016 saw a 19 percent year over year increase in commercial real estate investment on the part of Chinese nationals. While this rate may be declining, the US market remains strong and some speculate foreign investors are simply waiting for prices to stabilize.
The decline in foreign investment isn’t likely to have a long term impact on the rate of commercial real estate financing. Foreign investors are not retreating entirely from US commercial real estate.
Foreign commercial real estate investment still remains above historic norms. Deals brokered on behalf of foreigners still accounted for 14 percent of all the deals that closed this year. While this is down from 2015, such rates of foreign investment in US commercial real estate were likely unsustainable. “Investment volume in calendar 2015 hit an astronomically high level and not what I would consider would be a sustainable level,” said O’Brien, “it created an investment environment in 2015 that was just off-the-charts strong. The pullback is somewhat natural.” Analysts speculate that many foreigners are simply waiting for prices to return to normal. Foreign money will likely return to the US commercial real estate market once investors can purchase properties at a greater value.
In spite of the apparent decline of foreign interest in US commercial real estate the fundamentals of the market remain strong. Foreign investment will likely stabilize closer to historic averages and as demand cools prices are likely go down.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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