The US Is A Good Market To Invest In Commercial Real Estate

The world’s population is growing at an alarming rate, and because space on Earth is not expanding to accommodate this growing population, this creates a serious problem for both housing and food availability. In relation to this, the real estate industry has grown in many regions of the world. The commercial real estate markets in the United States have seen an influx of international investors, which has been sparked by a variety of factors. Due to Brexit, the majority of foreign investors began looking for alternatives because they were concerned that investing in the UK was risky. One of the best alternatives that investors perceived to be offering a favorable climate for commercial real estate investment was the U.S, especially in five major U.S cities such as Los Angeles, New York, Seattle, San Francisco as well as Boston. Political and economic stability of the U.S has also attracted most investors from Canada, Singapore, China and Norway to invest in the U.S commercial real estate markets. Consecutively, Low Interest and cap rate environment has created a good environment for foreign investment in commercial real estate by ensuring that it has a low interest rate for the foreign investors. Moreover, the volatility of crude oil production has negatively affected the oil producing countries such as Russia, Brazil, Mexico, Venezuela, Canada and others, where most investors comes from. The investors from these countries perceive U.S commercial sector to be safe to invest.

The United State Is A Good Market For Commercial Real Estate Investment

Introduction

In the contemporary world, the world`s population is increasing in an alarming rate. precisely, by the end of April this year, the world`s population was approximately 7.5 billion, and this figure is expected to hit 11.2 billion by 2100 (Baylis, Owens & Smith, 2017). Considering that the world space is not increasing in order to accommodate this increasing number of individuals, this poses a critical situation in terms of the provision of food as well as accommodation. Despite this, the increasing number of individuals in the world is making some sectors to thrive. In connection to this, the real estate sector has developed in numerous parts of the world, especially in the developed countries. In addition, some nations have put in place strategies that enhance the real estate sector to thrive, especially by enticing investors from within and outside the country. In this regard, the United States is one of the good markets for foreign investors to invest in commercial real estate. This paper pays high attention to the analysis of why the United State is a good market for foreign investors to invest in commercial real estate.

Brexit Woes

One of the main factors that have led to the increase of foreign investment in the commercial real estate sector is the Brexit aspect. Brexit is a term that is used to describe the British exit from the European Union. A referendum that was aimed at voting on whether Britain should leave or stay within the European Union was held on Thursday 23rd June 2016. Majority of the British voted for the United Kingdom to leave the European Union by 51.9 percent against 48.1 percent of those who voted for the U.K to remain in the EU (Maher, 2016). Apparently, through this decision, most investors from the other parts of the world feared that investing in the U.K was a risky decision and started seeking for alternatives. One of the best alternatives that investors perceived to be offering a favorable climate for commercial real estate investment was the U.S, especially in five major U.S cities such as Los Angeles, New York, Seattle, San Francisco as well as Boston. The Brexit factor made U.K, which had been in the second place globally in terms of foreign investment in commercial real estate, has dropped to the fifth place. In particular, London, which has been ranked in the last five years as either the first or second city in the world in terms of foreign investment in commercial real estate, has dropped to third position.

Political and Economic Stability

Political stability in the U.S has also helped in enhancing foreign investment in commercial real estate sector. Precisely, for an investor to make up the decision of investing in a foreign land, he or she must take into consideration the security, political stability and the level of democracy that have been prevailing in the foreign country. In the United States, these values have been highly embraced despite the country being composed of numerous states. When political stability is being enhanced in the United States, other foreign nations have been suffering from political instability, and this negatively affects these countries in terms of attracting foreign investors. Precisely, there have been a myriad of events that have occurred in various countries in the recent past and have resulted to political instability. For example, Brexit, which has occurred in the recent past, has put foreign investors on the edge. In addition, turmoil in Greece, Japan, and Turkey has resulted to the reduction of investors` confidence in the global markets. Consecutively, the Danish National Bank, the Bank of Japan, the European Central Bank, as well as the Swiss National Bank have all reduced deposit rates and this has made most foreign investors to withdraw their money out of these banking systems (Lieser & Groh, 2014). When these banks slash the deposits rates of these investors, they stimulate the latter to start considering other alternatives of making money. One of these alternatives has been investing the amount of money that these investors withdraw from these banks and investing them in commercial real estate sector. This is among the contributing factors for the significant flow of capital in the U.S commercial real estate.

According to the Real Capital Analytics (RCA), a real estate data and advisory firm that is located is New York, most of foreign capital in the U.S comes from Canadian investors. The RCA depicts that the Canadian Investors spent approximately $27.5 billion in commercial real estate in 2016, and this excludes a myriad of significant deals such as the $5.3 billion purchase of Manhattan`s Stuyvesant Town, a joint venture between the Canada`s Ivanhoe Cambridge Inc. and the Blackstone Group (Ritcher, 2017). For a number of decades, Canada had dominated cross border capital in the United States` commercial real estate. This is mostly due to the fact that the institutional real estate investment market is dominated by limited, large players and institutional quality assets trade in open market in rare occasions. as a result, the Investors in Canada consider investing in the U.S since the commercial real estate investment landscape is large (according to the RCA, the commercial real estate investment landscape is approximately 15 times larger compared to that of Canada).

Besides the Canadian investors, the Asian investors have also greatly contributed to cross border capital investing in commercial real estate sector in the U.S. Precisely, Singapore and China are among the major Asian investors who have been investing in the commercial real estate in the U.S, amounting to $22 billion and $10 billion respectively (Maher, 2016). These figures are deemed to increase in the years to come since the U.S dollar is continuing to gain value in the foreign exchange market.

In the economic perspective, the U.S commercial real estate sector is the most stable and transparent sector in the world and it is associated with price appreciation potential as well as higher relative yields, and this makes it an easy investment choice to most foreign investors. According to the Association of Foreign Investors in Real Estate (AFIRE), the foreign purchases of U.S real estate assets increased to more than $87 billion in 2015 alone, with China, Norway, Canada and Singapore riding the wave (Ritcher, 2017). According to the Real Capital Analytics, this figure is up from $4.7 billion in 2009. In 2017, the purchase of commercial real estate assets is deemed to increase as well especially due to the numerous changes that have been done to the 1980 Foreign Investment in Real Property Tax Act (FIRPTA), including the aspect of allowing foreign investors being treated similar to their U.S counterparts.

Consecutively, the U.S economic landscape continues to grow moderately, and this has foster the creation of employment opportunities, to such an extent that the rate of unemployment has dropped to below 5 percent earlier this year. The increasing rate of employment is stimulating the demand for rental houses, office space, as well as distribution or industrial facilities. This increasing demand of houses, coupled by political stability of the U.S as well as political uncertainties in the other global countries has made most foreign investors flow in the U.S commercial real estate sector.

Low Interest and cap rate environment

The United States have also created a good environment for foreign investment in commercial real estate by ensuring that it has a low interest rate for the foreign investors. Precisely, before an investor make the decision of investing in a foreign country, he or she must take into consideration the interest and tax policies that have been set aside by the host country. Precisely, if the interest rates are high or are deemed to be increased, it means that the investor will not manage to gain much revenues considering that the business that he or she intends to invest will as well be subjected to stiff competition by the local firms. In the U.S, the interest rates for foreign investment are low in order to entice foreign investors in implementing their investment decisions (Maher, 2016). Apparently, due to the increasing economic expansion and employment rates, Fed has been seeking another rate hike before the end of the year and this may negative affect the rate of foreign investment in the commercial real estates. According to the speculations of numerous economists, Fed intends to raise the rates by 0.25 percent to 0.50 percent in this year, but this will depend on the economic performance of the country.

The low interest rate as well as the stabilization of financial markets has made the commercial real estate market to normalize especially at end of the second quarter of last year. During the first half of 2016, the commercial real estate market had experienced a decline due to decline in stock markets, global economic volatilities and more importantly the concerning on interest rate hikes. Consecutively, during the first quarter of 2016, the commercial mortgage backed securities (CMBS) market also recorded a decline due to more stringent risk retention regulations under Consumer Protection Act and Dodd Frank Wall Street Reform. Precisely, during the end of the first quarter of 2016, approximately US $30.7 billion in CMBS had been given out in the U.S, and this was low compared to U.S $ 54.5 billion in 2015 and U.S $40.8 billion in 2014 (Maher, 2016).

Volatile Energy Markets

The volatility of crude oil production has negatively affected the oil producing countries such as Russia, Brazil, Mexico, Venezuela, Canada and others. Precisely, in the recent past (2015 to be precise), there had been dramatic drop of oil prices to such an extent that the cost of one barrel has reduced from $110 to as low as $27 (Association of Foreign Investors in Real Estate, 2017). There has been an increased level of production of crude oil but the demand has remained considerably low due to the slowing global growth, and this has been the core factor that has contributed to the fall of crude oil prices. Most foreign investors originate from these oil producing countries.

As the foreign economies continue to perform poorly, especially due to the falling of oil prices, their currencies has been devalued compared to the U.S dollar. Initially, most economists perceived that when the value of a dollar becomes high compared to the other currencies, it will discourage investors from implementing their investment decisions especially due to the fact that their purchasing power will decrease. Apparently, the recent extreme volatility of the global markets and the stability of the U.S economy (and the housing market in particular), had resulted to an opposite effect (Association of Foreign Investors in Real Estate, 2017). Precisely, with the increasing value of the U.S dollar compared to the other currencies has stimulated most investors to implement their investment decisions. Moreover, the foreign investors, especially those from the countries whose domestic economies are contracting perceive the U.S real estate as a safe haven to their finances, and this is among the contributing factors for the high influx of foreign investors investing in the commercial real estate sector.

Moreover, when the price of gasoline is low, it stimulates or encourages consumers to spend more on items which help hotel and retail market fundamentals. Consecutively, lower costs of oil and energy also reduces a number of manufacturing, construction and logistic costs. In the long run, lower costs of oil facilitate business expansion and expansion, which then enhances the demand for manufacturing and industrial space. Precisely, property markets gets short term thriving advantage especially due to a combination of both lower cost of operating and improved tenant fundamentals. The U.S is a regular importer of oil, and it imports approximately $190 billion per annum, and this means that when the price of oil decreases it positively influences the country`s trade balance. Precisely, when the price of oil is low, it means that there is an increase in household disposable income.

References

Association of Foreign Investors in Real Estate, (2017). 2017 Investment Survey Press Release. Retrieved from, http://www.afire.org/2017_rei_survey_pr

Lieser, K., & Groh, A. P. (2014). The determinants of international commercial real estate investment. The Journal of Real Estate Finance and Economics, 48(4), 611-659.

Maher A., (2016). What you need to know about cross-border capital flocking to U.S. real estate. Retrieved from, https://www.buildium.com/blog/why-foreign-investors-buy-property-in-usa/

Ritcher W., (2017). Foreign investors are piling into the US commercial real estate bubble. Retrieved from, http://www.businessinsider.com/foreign-investors-pile-into-us-real-estate-2017-3?IR=T

Baylis, J., Owens, P., & Smith, S. (Eds.). (2017). The globalization of world politics: An introduction to international relations. Oxford University Press.

Appendices

Figure 1: Cross Border Capital by Region of Origin

Figure 2: 43-story apartment tower planned in Denny Triangle