Foreign Investment in U.S. Is Looking Up

With commercial real estate market conditions improving dramatically over the past three years, foreign investment interest in the United States has increased steadily. Surging lease rates, strong employment conditions, a robust economy, and low interest rates have made U.S. real estate an attractive investment.

A 1997 survey conducted by the Association of Foreign Investors in U.S. Real Estate (AFIRE) found that 83 percent of respondents indicated that they will maintain or increase their levels of investment in U.S. real estate in 1998. Eighty-one percent of the respondents said that U.S. real estate was a better investment than the European market, while 77 percent said it was a better investment than real estate in Southeast Asia. In 1992, only 30 percent of investors considered the U.S. market to be better than Europe’s, and just 29 percent thought it was better than real estate investment in Southeast Asia.

Foreign investors have changed their preferences in U.S. real estate. For four straight years, retail properties were their favorite investment. But in 1997, office properties moved to the top of the list, and industrial properties now occupy second place. A significant shift in the location of foreign purchases also has occurred. Big cities that experienced painful real estate recessions in the early 1990s now are making a comeback. California has been the top market for Asian investors, who have emerged as the leading buyers of hotels and office buildings in downtown Los Angeles and properties in Beverly Hills and San Francisco. AFIRE’s survey named Atlanta as the best U.S. city for real estate investment for the third consecutive year. Washington, D.C., and Boston followed Atlanta for the second consecutive year. Los Angeles and Chicago occupied fourth and fifth places, respectively, replacing New York City and Dallas in the rankings.

Asian Activity
Asian investment in U.S. commercial properties has increased significantly since 1993, when the U.S. real estate market was just beginning to recover, through the end of 1996, when the U.S. real estate recovery was well underway. Buying activity from investors in Hong Kong, Singapore, and Taiwan has increased in the past three years, although it will not measure up to the level of Japanese investors. Because of the losses suffered by Japanese investors during the early 1990s, new Asian investors were more risk-averse and less property-class conscious. They broadened the investment types in their portfolios to include nonpremium investments such as class B buildings as well as class A properties in major cities.

Currently, Asian investors increasingly have focused on the acquisition of trophy properties. In 1993 and 1994, single-asset purchases of more than $50 million accounted for 47 percent of total Asian investment in the United States. In 1995 and 1996, these purchases accounted for 70 percent of the total.

As a result of aggressively pursuing high-quality properties, Asian investors have a high profile in the U.S. real estate market. For example, in 1995, the Taiwan-based Forward Time Corp. purchased Los Angeles’ largest hotel, the Westin Bonaventure Hotel and Suites, for about $50 million. In 1996, the 11-story, 683-room Biltmore Hotel was sold by TAT Los Angeles Ltd., a Japanese firm, to the Hong Kong-based Regal Hotels.

A sluggish Japanese economy, burdened with an ongoing banking crisis, will continue to put pressure on Japanese owners to sell their U.S. commercial real estate assets. However, the sell-off of Japanese assets will slow down.

Capital flowed into the United States from Hong Kong prior to the hand-over to China. Given China’s forward-moving economy and the considerable wealth being created in Asia, Asian investment in the United States is likely to grow in the future.

German Investment
In the early 1990s, sharply declining U.S. real estate values, combined with strong tax incentives for property investment in a newly unified Germany, discouraged Germans from investing in the U.S. real estate market. However, dissatisfied with their current domestic investment conditions, Germans again are turning their attention to the U.S. market. In 1996, Germany’s direct investment position in U.S. real estate increased by nearly 30 percent, while Great Britain and the Netherlands’ positions decreased.

Direct Investment
Overall, foreign interest in the U.S. investment real estate market is a reflection of strong market conditions. Interest and investment levels should remain high as long as investment real estate continues to perform strongly. Foreign direct investment increased from $29.7 billion in 1995 to $30.1 billion in 1996. Even with the 1996 increase, foreign direct investment remains well below the high-water mark of $34.9 billion set in 1990. Although foreign investors represent a significant ownership group, they will have to compete with the much larger domestic investor categories such as real estate investment trusts, life insurance companies, and pension funds for investment real estate product. This competition should benefit the domestic investment real estate market by putting upward pressure on pricing.

George Green

George Green is a policy representative/senior economist for investment real estate at the National Association of Realtors in Washington, D.C.