Cross-Border Caution

They may still be on the lookout for U.S. real estate, but global investors are looking for safe investments as they wait out the pandemic.

New research from the Association of Foreign Investors in Real Estate may show that global buyers with long-term goals still have an appetite for U.S. real estate—but hard data from Real Capital Analytics shows that investment remains depressed and investors who are buying now are seeking out pandemic-proof properties.

In the four quarters ending in 2021 Q1, acquisitions by global investors (cross-border capital) of properties or portfolios of at least $2.5 million fell to $152 billion, a 38% decline compared to the pre-pandemic level in the prior four quarters through 2020 Q1. Industrial properties were the only asset class to see an increase, jumping 4%. Global investors pulled back on acquisitions of office (-42%), apartment (-36%), and retail (-70%). Despite the retreat, apartments still made up the largest asset class of acquisitions by investors, reaching a four-quarter total of $37.5 billion, still slightly ahead of total industrial acquisitions of $35.9 billion.

The acceleration of e-commerce sales has fueled demand for industrial space among both domestic and global investors. As of the first quarter of 2021, e-commerce sales accounted for 13.6% of retail trade sales, up from 11.4% in 2020 Q1, according to U.S. Census Bureau data. The national vacancy rate for industrial commercial real estate properties stood at 6.3% as of 2021 Q1, according to CoStar data. That’s compared to 8.8% for multifamily and 15.7% for office. With demand for industrial staying strong, the average rent (triple net lease) has increased to $10.4 per square foot, up 7.6% from 2020 Q1.

Meanwhile, with the office vacancy rate at 15.7% as of 2021 Q1 (up from 13.3% in 2020 Q1), investors are shying away from the office market, a trend that will continue as companies react to the latest COVID-19 wave with further delays in returning to the office. Office gross rent has decreased slightly to $49.59 per square foot from $49.80 per square foot in 2020 Q1, according to CoStar market data. Office vacancy rates have remained elevated as 50% of workers in computer and mathematical occupations continue to work from home, up from just 12% in 2019, according to the Bureau of Labor Statistics.

Top Global Investors Of U.S. Commercial Real Estate

By region of origin, acquisitions declined across all regions:

  • Europe (-48%)
  • Middle East (-28%)
  • Canada (-24%)
  • Asia (-16%)
  • Other regions (-75%)

A few countries, however, increased their investment in the past four quarters of 2021 compared to the prior four quarters, notably South Korea (+44%), with acquisitions totaling $5 billion. Saudi Arabian investors also increased their investment to $2.4 billion (+218%).

During the four quarters ending in 2021 Q1, Canada remained the largest investor in U.S. commercial real estate, with cross-border capital of $11.9 billion. Canada was also No. 1 in 2019 and 2020. South Korea was the second largest investor, up from fourth place in 2019, with cross-border inflow of $5 billion. Other countries of origin that acquired more than $1 billion of U.S. commercial real estate in the four quarters ended 2021 Q1 were Singapore, Germany, Saudi Arabia, Switzerland, and the United Kingdom.

Top Cross-Border Markets

Manhattan slid to the No. 2 destination for cross-border investment behind Seattle. Global investments of Seattle commercial real estate during the four quarters ended 2021 Q1 totaled $2.5 billion, a tad higher than the $2.0 billion that went into Manhattan in the same period.

The change is likely a direct result of COVID-19: Cross-border acquisitions fell 79% year over year in Manhattan compared to Seattle’s 11% year-over-year decline. The other metro areas with over $1 billion in cross-border investments were San Francisco, Chicago, Dallas, Atlanta, Los Angeles, Phoenix, Boston, and San Jose.

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