Brexit Spurs International Interest in U.S. Commercial Real Estate
Posted on July 11, 2016
Global investors look to stability of U.S. commercial real estate market as safe haven
As the fallout from Brexit continues to stir market volatility, many international investors are seeking the security and economic stability of the U.S. commercial real estate market. Coupled with low interest rates for loans, brokers who belong to CCIM Institute, one of the largest international networks of commercial real estate professionals, are seeing an increase in global activity in commercial real estate investments from primary gateway cities to tertiary markets.
“The trend of Foreign Direct Investment (FDI) net inflows of capital toward the U.S. commercial real estate market will remain strong, and the Brexit initial ripple effect for demand in the U.S. will initially increase as investors seek security,” says Kamil Homsi, CCIM, president of Global Realty Capital LLC in New York City. “Additionally, I see the demand increasing constantly to acquire senior and student housing, self-storage portfolios, and medical facilities across all regions.”
Interest rates in the U.S. are likely to remain low. U.S. benchmark yields hit record lows last week. According to the U.S. Department of the Treasury, the 30-year Treasury yield plunged to a record low of 2.098 percent before recovering to 2.12 percent. And the 10-year Treasury closed below 1.4 percent for the first time, falling to 1.367 percent.
The continuing European market uncertainty, declining British pound, and the strengthening of the U.S. dollar make it less likely that the Federal Reserve will move rates up or take other tightening measures this year. This has far reaching implications for U.S. commercial real estate markets.
“Commercial office space is often the preferred investment for overseas investors,” says Ernest Brown IV, CCIM, broker at Rohde Ottmers Siegel Realty in San Antonio, Texas. “But we also are seeing an increase in demand for well-located newer industrial assets for warehousing, distribution, and service.”
The historic stability and low volatility, even within the presence of low cap rate markets, will continue to drive foreign investment into the U.S. commercial real estate market.
This will drive up prices and lower cap rates for commercial buildings in several cities according to Reis Analytics. Primary gateway cities including New York City, Los Angeles, San Francisco, and Boston will see the most impact, but secondary and tertiary markets are also stand to see increased activity because investors have yet to drive up prices.
“Shortly after Brexit, I received several calls from international investors seeking more information about Texas commercial real estate,” says Jim Young, CCIM, broker at Longbow Real Estate Group in Austin, Texas. “In addition, several U.K. investors tell me that they see U.S. commercial real estate as a safe haven. Given low interest rates on commercial real estate loans, and commercial rental rates in Central Texas that continue to rise, there will be even more of an uptick in European and global investor activity.”
While some U.S. assets may be sold to shore up assets held in the Great Britain and elsewhere by foreign investors, the long term goal is the safety of the investment. Historically, foreign investors rarely take their capital out of the U.S. commercial real estate market unless there is a major drop in valuation within European gateway cities. This is unlikely due to limited available inventory, time needed, and European Union exit tax complexities. Brexit further complicates the matter with increased uncertainty.
“Investments in the U.S. will only get stronger as a result of these factors,” says Eric Rutherford, CCIM, broker at Wright Kingdom in Boulder, Colo. “Individuals in the European market may take a risk and reinvest, but I just received word from a group of investors pouring $10 million into the U.S.”
The U.S. has always been a safe haven for global investors. With the continued repercussions of Brexit yet to be fully realized, many foreign investors actively seek to reposition their assets to a stable economy. The increased activity in U.S. commercial real estate properties by global investors looks to continue.