Market analysis Foreign Investment

Land of Opportunity

Foreign investors rejuvenate the U.S. commercial real estate market.

By Dave Liniger |

It's no secret that commercial real estate in the U.S. has had its fair share of struggles as the economy gets back on track. But when compared to other parts of the world such as Europe, which is experiencing sovereign debt crises and economic angst, the U.S. is still one of the most attractive options for foreign investors with capital to spend.

Just as we've seen in the housing market, challenging times create great opportunities in the commercial sector. Foreign investors recognize this, and they see the value in investing in U.S. commercial properties. Savvy, professional commercial brokers can expand their businesses to include this growing client base and be a part of something big.

The numbers tell the story: For the first time since 2007, cross–border acquisitions topped $7.8 billion in third quarter 2011. What's more, these buyers accounted for more than 10 percent of all sales volume — another recent high, according to Real Capital Analytics.

Underpinning global investment activity is a mix of buyers who are looking for quality assets, investment safety, and high returns. U.S. commercial markets possess these strengths, says George Ratiu, manager of quantitative and commercial research with the National Association of Realtors.

"The U.S. is attractive to global investors because it has a mature and stable economic environment, which provides investors with quality assets and capital safety," Ratiu says. "Another factor is the rising availability of investment capital in China. While Chinese real estate continues to be a powerful magnet for international investors, Chinese investors are looking to diversify their holdings, and the U.S. is an ideal choice. Also, the soft dollar is making dollar–denominated assets a relative good buy."

Canadians Lead the Way

Looking at the overall picture, our neighbors from up north are the largest group of international investors, and they're flocking to the U.S. in droves. In 3Q11, Canadian capital represented one–third of all foreign commercial acquisitions, followed closely by Latin American and Asian investors, according to Real Capital Analytics.

Investors based in Hong Kong and China have also ramped up activity, with acquisitions surging to nearly $1.5 billion in the past year — a major increase considering these investors acquired practically nothing 18 months ago. South Koreans are right on their heels, totaling well over $1.1 billion worth of commercial investments over the past year.

The surge in Canadian acquisitions is a relatively new phenomenon, driven mostly by strong economic conditions and a stable Canadian dollar, says Jim Fetgatter, chief executive of the Association of Foreign Investors in Real Estate, a trade organization that represents foreign investors interested in U.S. real estate.

"Canada's economy never went through the financial crisis we did during this recession, so the U.S. is an ideal choice, plus there are limited investment opportunities in Canada due to the smaller size of its commercial market," Fetgatter says.

It might be surprising to some that despite the influx of cross–border acquisitions, purchasing U.S. real estate is actually a difficult endeavor for foreign investors, due in large part to Foreign Investment in Real Property Tax Act legislation. FIRPTA mandates that foreign investors be taxed on dispositions of U.S. real property interests. It makes transactions more costly and time–consuming for inbound investors.

"No other type of foreign investor is taxed on capital gains in the U.S. except for real estate investors," Fetgatter says. "The manner in which foreign investors tailor their acquisitions for tax purposes depends on whether the U.S. has a double taxation treaty with that country and what kind of investor they are. For example, high–net worth individuals are taxed differently than foreign pension funds in relation to how they're able to structure their investments."

Secondary Markets Gain Steam

Traditional commercial gateway markets such as Manhattan, which accounted for 40 percent of foreign purchases through 3Q11, are still the hot destinations for global investors. But cities like Miami, Houston, Seattle, Dallas, and San Diego are making gains in commercial investment activity.

In Miami, for example, foreign investors purchased more than $650 million worth of commercial properties as of mid–October. Asian investors led the way, accounting for about 63 percent of all foreign capital in the city, according to RCA data.

JM Padron, CCIM, broker/owner of Re/Max Commercial Associates in Fort Lauderdale, Fla., is seeing this firsthand. Large multinational companies, such as Genting Malaysia Berhad and Hong Kong's Swire Group, have recently announced major multimillion–dollar investment projects in downtown Miami. And that's just the beginning.

"Asian investors are definitely prominent in South Florida investments, but we're also seeing major players come in from Brazil and other Latin American countries; Brazilians account for 35 percent of commercial buys in downtown Miami," Padron says. "Israel also is an important investor in South Florida; the Dizengoff Group has invested $85 million, mostly in anchored retail centers and bulk condo deals."

Nationally for foreign investment, office sales have recovered quite nicely, accounting for over half of cross–border acquisitions as of June 2011 — a 65 percent year–over–year increase over 2Q10, according to RCA. The retail and apartment sectors, however, recorded the largest gains, signaling an emerging preference for those property types.

If 2011 numbers are any indication, more foreign investors will be looking to diversify their holdings — and they'll be investing their capital in the U.S.

Dave Liniger is co–founder and chairman of Re/Max, one of the leading real estate franchise companies with a global reach of more than 80 countries. Contact him at dave@remax.com.