What’s driving inbound investment?
As the immigration debate raged in Washington, D.C., earlier
this year, inbound international investors were quietly establishing themselves
as big players in the Federal City’s commercial real estate market.
Cross-border investment in the District of Columbia jumped 83.3 percent year
over year to $1.9 billion in the first half of 2013, according to Jones Lang
destination is no coincidence. Core markets such as Washington, D.C., have been
the main targets for international investors for years. Since 2007,
cross-border investors have closed more than $148 billion in transactions, with
Manhattan, Los Angeles, and Washington, D.C., leading the way, according to
Real Capital Analytics. However, more than half of that volume was pumped into
secondary and tertiary markets, driven by improvements in technology and energy
markets, as well as housing.
course, transparency is a big draw for inbound investors. But immigration, in a
sense, is also a factor, though it may not be driving the conversation on
investors seem to have the same motivations that local citizens have, except
for the entrée-to-citizenship factor,” says Frecia Johnson, CCIM, senior vice
president of Coldwell Banker Commercial in Irvine, Calif. “In the past,
[inbound investors] were primarily interested in owning properties but rarely
lived here. Now these investors are represented by many ethnic groups who live
and work here.”
Johnson’s market, they may be purchasing office, industrial, or retail space
for their own businesses, targeting long-term investment opportunities in their
neighborhoods, or buying owner-user buildings to obtain a green card. This
shift is not only changing the inbound investment landscape, but also causing
U.S.-based advisers to rethink how they assist these clients.
Major Players and Target Markets
substantial amount of the international investment capital is flowing in from
Canada, which represented approximately one-third of all inbound activity last
year, according to Jones Lang LaSalle. But private investors from a variety of
countries are seeking opportunities across a broad spectrum of U.S. markets.
multifamily in growth markets is the most coveted property type among
international investors. Since 2012, instability in foreign markets has helped
to push multifamily transaction volumes back to peak levels, JLL notes.
Chicago, Dallas, Houston, Manhattan, and South Florida each saw more than $300
million in cross-border apartment purchases from 1Q12 through 1Q13. Investors
based in Canada were most active, followed by those based in Switzerland,
Israel, the United Kingdom, and Kuwait.
Knutson, CCIM, senior vice president with Cornish & Carey Newmark Knight
Frank in Emeryville, Calif., recently received a referral from a local
residential agent to work with Norway-based investors. He represented them in
the purchase of a 20-unit multifamily portfolio in Oakland, Calif., for more
than $3.6 million. “They liked the rental potential of this investment and also
the conversion potential to sell as condos later,” he explains. The portfolio
transacted at a 5 percent capitalization rate, with approximately 10 percent
upside rent potential. (Perhaps these investors were taking a cue from their
government. Norway recently granted permission for its $665 billion Norwegian
Government Pension Fund Global to invest in property outside of Europe this
year, according to JLL. As of 1Q13, the fund’s manager, Norges Bank Management,
planned to allocate $11 billion to U.S. investment opportunities.)
competition for multifamily properties is driving international investors to
consider other sectors. “We’ve noticed more Japanese investors and some Chinese
investors acquiring office buildings and hotels in Hawaii,” says Mark Bratton,
CCIM, vice president of Colliers Monroe Friedlander in Honolulu. Bratton cites
recent acquisitions by Japan-based Sanno Group, including the purchase of the
Waikiki Galleria, a 15-story office and retail tower.
fact, some international investors are avoiding multifamily opportunities
altogether. Matson B. Holbrook Jr., CCIM, vice president of Siegel-Gallagher in
Milwaukee, recently represented a Singapore-based investor seeking multitenant,
grocery-anchored retail properties in noncore markets. “Remarkably, they were
not interested in multifamily investment, as the news in Asia about the U.S.
single-family residential market over the past five years has scared many away
from residential altogether,” Holbrook says.
properties in secondary markets are also drawing attention from cross-border
investors searching for better cash flow. Patrick O’Sullivan, CCIM, senior
associate with Gerchick Real Estate in Phoenix, primarily works with private
investors from Alberta and British Columbia, Canada, who are targeting
multifamily and single-family portfolios with 7 percent-plus cap rates, which
aren’t available in their markets.
recently represented a Canadian buyer who purchased a portfolio of three
four-plexes in Phoenix with an 8 percent cap rate for $480,000. “The property
had a few vacant units, and I helped [the buyer] get an entity formed, identify
the property, coordinate the inspections, coordinate the closing, and get it
transferred to a property management company,” he explains. Gerchick Real
Estate prides itself on being a “one-stop shop” for international investors,
cross-border investors can benefit from finding U.S.-based advisers who can
walk them through transactions and identify potential opportunities and
citizenship is a major driver of investment activity, advisers should be well
versed in the EB-5 program. (See “Foreign Aid,” July/August 2013 CIRE.)
This federal program grants visas to foreign nationals who invest a minimum of
$1 million in projects that can create at least 10 jobs. (The minimum is
$500,000 for projects located in “target employment areas.”) The two-year visa
can be converted into a permanent U.S. citizenship for investors and their spouses
see this program as an opportunity to diversify assets into the U.S. market,
which is considered more stable than other areas,” says Ted W. Dang, CCIM, CPM,
of Commonwealth Real Estate in Oakland. And Holbrook notes that several EB-5
investors are active in Milwaukee.
federal programs and laws are also complicating the process. For example,
Knutson’s Norwegian client had trouble wiring money and getting bank financing
due to the Patriot Act. “All U.S. lenders we contacted were nervous about
lending on the deal since the assets in the U.S. were not substantial … and the
banks couldn’t consider an off-shore financial statement,” he explains.
Eventually, his client closed all-cash.
Dodd-Frank Act has also caused banks to tighten their standards. “Banks have
informed us that they can only open accounts for investors from Mediterranean
countries if they have a face-to-face meeting with all the principals,” says
Paul L. White, CCIM, CPM, managing director of KW Commercial in Miami. “And if
the investor has businesses that deal in financial markets, banks are very
hesitant to open accounts for them.” After many months and many meetings, White
found a community bank that was willing to accept scrutiny from regulators.
then there’s everyone’s favorite: taxes. “For the typical agent, taxation will
always be a challenge,” O’Sullivan says. As soon as his company begins working
with an inbound investor, it sets up accountant and lawyer referrals. And for
larger investors, it often brings in a cross-border “wealth manager” who knows
the tax treaties. On the other hand, Arizona’s investment-friendly tax
structure is another draw for these clients, he adds.
Ernest L. Brown IV, CCIM, executive vice president and managing director with
Newmark Grubb Knight Frank in San Antonio, working with international investors
is, fittingly, a game of risk. “Dealing with the tax code is complicated and
hinders the process; however, it is not unlike currency fluctuations, which can
also impact returns,” he explains. “The investment is ultimately a combination
of lower risk in the real estate and calculated risks when dealing with
currency fluctuations and tax treatment.”
driven by citizenship, transparency, or simply better returns, cross-border
interest in U.S. commercial real estate continues to grow. Advisers who can
provide the knowledge and resources to help international clients navigate the
inherent obstacles and opportunities are setting themselves up for repeat
business — not only from cross-border investors, but perhaps from new domestic
investors as well.
Rosfelder is associate editor of Commercial
Investment Real Estate.