Foreign investors are cooling on U.S. commercial real estate
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There are still a lot of unknowns about the commercial real estate market, especially concerning office space. But one thing we do know is that foreign investment in commercial real estate here in the United States has scaled back significantly, with some exceptions. And that decline, and those exceptions, shed some light on just how domestic commercial real estate is doing.
The height of foreign purchases of U.S. real estate was in 2017.
“That was representing on the residential side $153 billion,” said economist Jessica Lautz, vice president of research with the National Association of Realtors.
It’s now just $53 billion. “It really has come down,” Lautz said.
But the percentage of homes in the U.S. owned by non-Americans is usually pretty small — between 2% and 3%. The percentage of commercial real estate owned by foreign investors is a lot higher — or at least it has been.
“Historically, the average is around 10 or 11%, and last year it was 6%,” said Riaz Cassum, global head of international capital for real estate services company JLL.
That drop? Stephen Bethel saw it first hand. He’s national director of Frazier Capital Brokerage & Valuation.
“My Tiawanese banking clients, they’re not making any commercial real estate loans in the United States right now. And the home offices are afraid of U.S. commercial real estate, and we’ve heard that also from some of our Canadian clients as well,” Bethel said.
On the one hand, interest rates are still high and there’s uncertainty about when they’ll come down. That’s affecting investors both foreign and domestic. Sales volume in commercial real estate is down 63% in the U.S., Bethel said.
But on top of that, some foreign investors have economic problems back home and need to cash out — that’s particularly the case for Chinese investors. Korean investors bet heavily on office space in the past, got burned and are getting out.
“Yeah, we’re seeing office buildings sell for 30, 40, 50, even 60% below what the values were at the top of the market,” Cassum said.
But there are areas of commercial real estate where foreign interest is strong.
“I was just in the Middle East meeting with a lot of the large sovereign wealth funds and big investors. They continue to be interested in U.S. real estate but they are more focused on things like data centers, life sciences, student housing,” Cassum said.
Things that are not office buildings. That foreign interest is helping prop those sectors up while office buildings continue what Cassum calls a slow burn.
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