The Planet Is in Chaos, But It’s Not Too Chaotic for Global CRE Investment
Last week’s Democratic presidential debate was a mess.
The way it unfolded was symbolic of the confusing, hectic and dramatic state of the world and the global economy today, with the U.S. at the forefront. Not only is there a fraught, high-volume election in nine months, but there’s also the growing coronavirus epidemic. And a plunging stock market. And the foggy outlook of life after Brexit. Each of those on its own would bring even the most optimistic investor to a pause.
But, if you sift through the muck, there’s a diamond in the rough that is global commercial real estate investment in 2020, plowing along and driven by certain macro trends emerging amid the ruckus.
One wouldn’t necessarily think this at first blush. Last year, those eager financiers were somewhat pushed out, with foreign investors only pouring $46 billion into U.S. commercial real estate in 2019, down 49 percent from 2018, according to information from Newmark Knight Frank. In fact, 2019 was the first year in several that foreign investors became net sellers of U.S. real estate, according to recent information released by Real Capital Analytics.
But this year — despite a rollercoaster of global events — they’re back.
“For Korean investors in 2020, the absolute focus is [back] on the U.S.,” said Newmark Knight Frank’s Alex Foshay, a vice chairman and the head of the firm’s international capital markets division, adding that currency hedging costs falling back relative to the U.S. dollar has reenergized investors (more than two-thirds of foreign investors hedge currency risk from cross-border investments, according to a 2017 report from the European Association for Investors in Non-Listed Real Estate Vehicles). “[They] had been investing heavily in the U.K. and Europe [in 2019], where they actually saw a hedging premium to their investments.”
Industry participants who spoke with Commercial Observer said that U.S. real estate investment from offshore groups is poised to return with gusto after last year’s retreat. Despite the uncertainty, the U.S. poses this year — headlined by a presidential election — foreign real estate investors are attracted by robust fundamentals created by a strong economy and by the country’s “intense preservation of the rule of law,” according to Foshay. “That backdrop is one central reason the U.S. is so attractive; it’s still one of the most stable democracies in the world.”
Foshay traveled to Asia in January and to the Middle East in December and was frequently asked about the impact of the election.
“[Foreign investors] like certainty and anytime there’s a major election, it creates that uncertainty,” Foshay added. “If policies remain the same, the effect of the election can be overstated. There is a great divergence in opinions at the moment. Politics are very polarized. Investors are looking on in the hope of seeing some national consensus behind one approach to governing the country. As we get closer, they’ll feel more confident.”
That caveat shows that foreign real estate investors remain confident in U.S. institutions. And no matter how volatile or uncontrollable a Trump administration may be, investors see economic and regulatory stability in the U.S., and the potential for a new regime in the White House wouldn’t necessarily change that.
Cain International founder Jonathan Goldstein said the world of international investors is akin to “walking down a street full of shops and each storefront represents a different country. You have your choice and you have to make sure the shop front looks good to investors. In a democracy, your driving purpose is to make your electorate happy. So, you have to make sure the investment future looks attractive, whilst satisfying the electorate by whom you’re ultimately judged.”
“The U.S. and [commercial real estate] is still a safe haven,” said Melissa Reagen, the head of research in the Americas for Nuveen Real Estate, a major global investment management firm. “I think while the Chinese will be net sellers [partly because of the ongoing crisis with the coronavirus], you’ll still see [strong] foreign capital inflows to real estate, and that’s irrespective of who gets elected [in November]; now, whoever does will determine the trajectory of U.S. economic growth. But for foreign investors, it doesn’t matter who’s president, [the U.S.] still presents a stable regulatory system, and the rule of law is strong.”
And as for foreign interest in debt, German banks remain at the fore and are very active in the senior loan space, sources told CO, while Korean institutions — still focused on equity investments in the U.S. — are also active in looking for attractive mezzanine positions. Other foreign investors have been eyeing senior positions and construction loan opportunities.
Outside of the U.S., London has been the epicenter of commercial property investment, especially for high-end office products — many investors across the globe are especially interested in offices in key gateway markets that feature top tech tenants. The years-long hodgepodge of Brexit has ended (finally), bringing more certainty as well as a blitz to get back into the real estate market.
“We have been a large seller in the U.K. for literally the last 24 months, but it’s outperformed what we would have thought. So at this point, we’re looking to redeploy in London again,” Michael Turner, the president of Toronto-based Oxford Properties, which has around $60 billion in assets under management across the globe, told CO. The firm has mostly focused on multifamily investment in the country.
“A lot of occupiers have spent years delaying decisions because they don’t know what the regulatory landscape will look like or what the trading arrangements will look like. At some point, people have to stop kicking the can down the road and make decisions,” Turner added. “We’ve reached that point; there’s no more debate, ‘Will Brexit happen or not?’ It’s happening. It’s still a great city, and we’ll be looking to start acquiring there again, at scale.”
Foshay said that now that Brexit is underway, “many offshore investors are starting to come forward, especially for central London products. A lot of the [next substantial wave of investment into London] is adopting a wait-and-see approach on how U.K. economic performance will be impacted by sitting outside the European Union, but there’s now consensus that we don’t expect the financial services industry to make a mass exodus from central London.”
He added, “flows into London, we expect, will build significantly in the first half of 2020, and that will be the broadest pool of investment from around the world — from North America, Asia Pac, the Middle East and continental Europe. Investment into Central London at a normal time is 70 percent made up of offshore investment, and I think we’ll see a return to that trend over the next six to 12 months.”
Europe saw a hefty increase in real estate investment from Asia-Pacific investors last year, according to industry observers who spoke to CO. But diminishing yields and sagging economic performance in key European and even Asia-Pacific markets has disenchanted many cross-border investors and pushed them back toward the U.S. this year.
“The EU saw considerable investment from Asia-Pac in 2019, especially from Korean investors, who were the strongest in investing there last year,” Foshay said. “But that demand has driven down cap rates, and that’s part of the reason that demand is reorienting to wanting to be in the U.S.”
Other international investors, like Nuveen, are exploring more value-add opportunities in the quest for higher returns in Europe — and Asia to a certain extent — working with uncommon asset types in the bloc that are needs-based and global in nature, like apartments, medical office, seniors housing and data centers, according to Reagen.
“The fact that EU interest rates are as low as they are, if you can actually pick out opportunities where yields can be created, that makes you very attractive in the marketplace,” Goldstein said. “We’re seeing investors and lenders flock to major cities across the whole of the EU and America as well.”
There is, however, an invisible fear that could keep investors at home, stamping out face-to-face interaction and deal-making and slowing the execution processes across time zones, among myriad unrealized worries that could crop up.
“The only threat I see … is the coronavirus,” said Foshay. “We’re working with all our major teams, and we have real-time exposure to the complications that it is creating at the moment. It hasn’t impacted investor demand [just yet], but it’s about the ability to get on the plane to see an asset or getting investors together in Hong Kong or Seoul. But still, it could increase the demand for U.S. [investment] as a further driver to a flight to safety, because it’s probably the least-impacted first world country, and it’s viewed as a country that will handle it best with medical attention and eradication. It’s more about disrupted deals. But, it’s too early to put numbers around it, but anecdotally, if anything, we’re seeing a more intense desire to get capital allocated to safe investments [because of the disease].”
On Feb. 24, the spread of the disease sent U.S. stocks — for years flaunted as the beacon of a strong economy by the Trump administration — tumbling; the S&P 500 registered its worst single-day performance in two years as investors retreated. U.S. bond yields fell, accelerating a trend that had started at the beginning of the year, with the 10-year note closing out Feb. 25 at the lowest mark in nearly four years.
At the same time, it was reported that coronavirus cases in Italy tripled in just two days, and Brazil confirmed its first case — the first one in South America. And on Feb. 26, the Centers for Disease Control and Prevention in the U.S. confirmed a coronavirus infection in California that was more than likely the first case without a link to international travel.
“You should always be ready for the exogenous variable and the black swan you didn’t expect; you have to assume something is coming,” Goldstein said, speaking broadly about possible disruptors. “In the global market today, things happen very fast, and we’ve got to watch for those variables, and that means you have to ensure your financings match the likely cash flows so you’re not caught short.”
Despite these worries, there’s opportunity. One can be found in the shift in logistics real estate, as supply chains from a handcuffed China are rerouted.
“One of the bigger things we’re looking into is the rerouting of supply chains,” Nuveen’s Reagen said. “It started maybe a year ago, with the U.S.-China trade war, and with businesses with supply chains routed through China, which has been shut down with the coronavirus. I think you’ll have more multinationals rerouting supply chains, reshoring back to the U.S. and using robotics to lower labor costs — labor isn’t as cheap as it used to be in China; it’s eroding. The growth in data centers and the use of A.I. and machine learning in warehousing can reduce the number of supply chains. There will be fewer goods coming from China, so it’ll be interesting to see how it plays out, as the demand shift could move to Sun Belt warehouses and East Coast properties. We see a real shift in the next 10 years in demand there.”
Over the last few years, the gap has been closing between the sophistication of foreign investors in the U.S. and their counterparts with the North American home-field advantage. Barring further escalation with the coronavirus, foreign investors are back in 2020.
“They have wasted no time [over the last 18 months] in becoming more well-versed and professional in the markets they’re considering, engaging and bidding on numerous opportunities, which has increased their familiarity with sellers and brokers in the U.S. and has helped their credibility,” Foshay said. “They’re more knowledgeable and more recognized in the U.S., but there are new investors consistently entering the U.S. market, and they need to go through the process that a more educated group has gone through over the last few years.”