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Foreign Investment in US CRE at Lowest Point Since 2011
Interest from international investors in U.S. commercial real estate (CRE) has plummeted to its lowest level since 2011.
Jordan B. & Han-Gwon Lung
June 14, 2024
Together with
Good morning. Foreign interest in U.S. CRE in Q1 dropped to its lowest level of deal activity since 2011. Plus, Life Science properties have grown into a top institutional alternative asset class.
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Market Snapshot
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Foreign Investment
Foreign Investors Pull Back, Spend Nearly 50% as Much on US CRE
Interest from international investors in U.S. commercial real estate (CRE) has plummeted to its lowest level since 2011, driven by falling property prices and reduced transaction activity.
Investment plunge: According to MSCI Real Assets data, foreign investors spent $14 billion on U.S. commercial properties in Q1 2024, a significant drop from $27.7 billion in the same period last year. This marks the lowest foreign investment level in U.S. CRE since Q3 2011.
Reluctance to sell: The overall investment market remains sluggish as property owners are hesitant to sell amidst low valuations and high borrowing costs. Jim Costello, chief economist at MSCI Real Assets, noted that sellers are waiting for potentially lower rates in the future to secure better deals.
Shifting preferences: A significant portion of the investment pullback is from the Asia-Pacific region, where investors are now more inclined to invest in U.S. debt funds rather than directly purchasing property. Despite the slowdown, international investors' share of the U.S. CRE market fell to just 6% in Q1 2024, only the second time since 2009 that it has dropped below 7%.
Zoom in: European investors are capitalizing on low prices and distressed assets in major U.S. metro areas. Notable deals include Kering's nearly $1 billion purchase of retail condos in Manhattan, Prada's $835 million acquisition on Fifth Ave, and Amancio Ortega’s $231.5 million multifamily building purchase in Chicago.
➥ THE TAKEAWAY
Looking ahead: European investors are particularly interested in distressed office properties in central business districts. By the end of Q1 2024, office sales made up 28% of foreign CRE acquisitions, up from 10% at the end of Q4 2022. Long-term foreign investment trends will likely depend on shifts in U.S. interest rates. As Costello points out, lower borrowing costs could stimulate both buyer and seller activity, with distress potentially catalyzing future sales.
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✍️ Editor’s Picks
Broker fee: NYC Council member Chi Ossé's bill to shift broker fees from tenants to landlords sparks heated debate over its potential consequences.
Life science surge: Life science properties have grown into a top institutional alternative asset, making up over 6% of holdings and boasting 12.2% annual returns.
Deflating expectations: US wholesale prices dropped 0.2% in May as the producer price index fell 0.2%, mainly due to lower goods prices.
Deficit dilemma: The total US budget deficit climbed to $1.2T in May, with $347B driven by higher borrowing costs.
🏘️ MULTIFAMILY
Breaking ground: AvalonBay will finally start building a 305-unit apartment complex in San Francisco’s Pleasanton Hacienda Business Park, joining a diverse 865-acre development.
South Floridian living: A JV between The Meyers Group and Accesso Partners secured an $88M refinancing package for the 336-unit Avery Dania East in Dania Beach, FL.
Affordable progress: The Central Valley Coalition for Affordable Housing and Pacific West Communities obtained $70.9M to build a 240-unit affordable housing complex in San Jose.
Thanks, Freddie: Aspen Square sold Millennium East, a 236-unit Las Vegas multifamily complex, to NNC Apartment Ventures, which obtained a $33.5M Freddie Mac loan for the purchase.
Bank to beds: 3L Real Estate is planning to convert a 330KSF Fort Worth building into over 300 apartments, costing $30M.
Student success: An 181-unit, 537-bed Tampa Bay student community was bought for $128.1M by Strategic Facility Partners from Development Ventures Group.
🏭 Industrial
Acting fast: Prime Group acquired 30 self-storage properties totaling 1.725MSF across 10 states in under 90 days.
Puget Sound prospect: Prologis (PLD) is ready to redevelop an obsolete, 62-year-old Port of Tacoma industrial property at 2602 Port of Tacoma Road in WA.
FedEx flip: A Portland Class A warehouse, fully occupied by FedEx (FDX), was sold for $32.5M to HCA Management. Gantry arranged a $16.3M loan for the buyer.
🏬 RETAIL
Retail Renaissance: US shopping centers are experiencing a revival as vacancy rates drop to 5.4%, their lowest level in two decades, with demand surpassing supply.
Depreciated deal: Core Acquisitions purchased Rice Lake Square shopping center in Wheaton for $34.25M, reflecting a 22% discount from Grosvenor’s 2004 price, amid challenges in suburban Chicago's retail sector and rising interest rates.
The big picture: Alamo Drafthouse Cinema, among the largest regional theater chains in North America, was acquired by Sony Pictures Entertainment (SONY) amid industry challenges.
🏢 OFFICE
More space: Blackstone (BX) will expand its NYC HQ lease by 30% at 345 Park Ave, occupying 28 floors as its workforce grows by 50%.
Affordable work-life balance: CityPads expands to LA with developer Sandy Albert, creating attainable rental options in walkable LA locations.
Competitor takeover: Industrious is poised to manage 240KSF at Tower 49, the former WeWork HQ in Manhattan, under a new 10-year deal.
Debt troubles: Shorenstein Properties, a long-standing presence in city skylines, faces significant challenges with $822M in defaulted or at-risk debt tied to office properties.
🏨 HOSPITALITY
Reinventing Stile: Aju Continuum's US branch has chosen Kasa Living to manage the 182-room Stile hotel in LA, purchased for $111M.
Texas dream fizzles: A lender foreclosed on a California firm's failed $19M hotel development in San Antonio after a $2.1M loan default.
Reviving an avenue: Aventura-based Keyah Real Estate plans a 238-key hotel on South Beach's Washington Avenue, acquiring buildings for $20M.
📈 CHART OF THE DAY
This graphic by Visual Capitalist highlights the top retail companies by domestic revenue, based on data from the National Retail Federation.
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