Foreign Investors Are Making A Strong Return to U.S. Commercial Real Estate Investments

By The ArborCrowd Team
Apr 27, 2022

When the COVID-19 pandemic began in 2020, many foreign institutional investors paused their capital allocations to the U.S. commercial real estate market amid travel restrictions and heightened uncertainty.

However, last year, foreign investments in U.S. real estate returned to the tune of $70.8 billion, which was nearly double the 2020 figure, according to The Wall Street Journal via data from Real Capital Analytics. The return of foreign capital helped propel U.S. commercial property sales to a record $809 billion last year, the WSJ indicated.

International investors placed capital into a wide spectrum of real estate sectors such as multifamily rental apartments and warehouses, which were some of the strongest performing segments of the industry in 2021 due to their resiliency to the effects of the pandemic. Additionally, a record 64% of foreign investments were in secondary metro markets. Foreign investors joined the domestic trend of investing in Sun Belt markets with strong fundamentals such as cities like Dallas and Austin, Texas, according to Commercial Observer.

Experts anticipate foreign investors could increase their commitments for commercial real estate assets in 2022, as more capital comes off the sidelines and rising inflation affects global markets.

Why Did Foreign Investors Return?

The U.S. economy recovered faster and stronger last year than most other major international markets, such as the European Union.

U.S. gross domestic product in 2021 increased 5.7%, which was the fastest growth rate since 1984, according to the U.S. Commerce Department. Additionally, the U.S. unemployment rate dropped under 4% by December 2021, and it currently sits at a considerably low 3.6% as of March 2022. The U.S. lost approximately 22 million jobs from February to April 2020 as the virus began to spread, but since then the economy has added 20.4 million workers, according to the U.S. Bureau of Labor Statistics.

In addition to the economic recovery, mass testing and vaccinations in 2021 reduced the threat of the virus, and travel restrictions were scaled back for international passengers, clearing a major hurdle blocking foreign investors from returning.

Finally, the U.S. commercial real estate market has benefitted from high rental demand and record rent growth in various sectors, including in multifamily. The single-family rental and build-to-rent asset class of the multifamily sector in the Sun Belt region in particular has seen a large interest from investors, because of strong renter demand.

What Does this Mean for U.S. Commercial Real Estate Investments?

Commercial property investments by foreign institutions is expected to remain steady or even increase in 2022 compared with last year, because capital allocated to real estate prior to the pandemic wasn’t fully deployed, and institutional firms are now under pressure to put the money to work, according to the WSJ.

Additionally, with geopolitical turmoil creating uncertainty in Europe, experts have suggested that the U.S. is the top “safe haven” for investments. Finally, global inflation is rising and U.S. commercial real estate, especially multifamily, can be a hedge against the value eroding effects of inflation.

As a result of an increase in foreign investments, overall demand for U.S. commercial real estate is expected to expand as firms are not just competing with domestic capital but also foreign capital once again.

National Association of Realtors members expect commercial property acquisitions by foreign buyers to increase for most property types in 2022, with the strongest being apartment buildings. The single family built-to-rent asset class, which is experiencing a surge of interest from renters and investors alike, may also see increased transactions in 2022.

The influx of foreign capital can lead to stronger exits for sellers as there could be more buyers competing for properties, and oftentimes, foreign buyers may pay higher prices as they are willing to accept lower yields than domestic investors.

With increased demand for assets from institutions, it may be challenging for individual investors to find solid deals in primary or secondary markets. Platforms such as ArborCrowd give individuals investors the ability to access institutional real estate opportunities with strong upside potential in various markets that exhibit strong fundamentals.

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