Share Of Foreign Investment In U.S. Property Market Near Historic Lows

While a famed Italian fashion house might have closed 2023 by splashing down more than $800M on Fifth Avenue real estate, foreign investors captured a historically small portion of the U.S. commercial property market last year.

With property prices still in flux and geopolitical instability spreading across the globe, these big-pocketed players aren't expected back in the market in force soon.

Investors based outside the U.S. accounted for just 3.4% of U.S. property acquisitions in the 12 months ending in September 2023, according to MSCI Real Assets data provided to Bisnow, the lowest share since December 2008.

After spending more than $15B on U.S. CRE in the first quarter of 2023, foreign investors spent $10.1B on U.S. CRE in the six months ending in September, the least over two quarters since the second and third quarters of 2020, according to MSCI data.

“There is some caution and fear out there. Even though the U.S. is more stable than other parts of the world sometimes, when you’re looking for safety, you stay closer to home,” MSCI Real Assets Executive Director Jim Costello said.

Cross-border investment was down 56% in 2023 through the third quarter, according to JLL, compared to a 50% decrease in overall U.S. CRE investment. International investors have pulled back from the U.S. commercial real estate market for the same reasons all investment has retreated. 

Increased interest rates and the pullback of lenders have made even funds that typically buy with cash more cautious to transact, despite falling values that might seem appealing.

“Multiple interest rate hikes, rising inflation and recession fears discouraged foreign investors to actually pull the trigger,” said Cecilia Xu, global capital placement director at Cushman & Wakefield. “I don’t believe it’s a long-term trend, as foreign investors still view the United States as one of the safest countries in the world to put their money. There was still a lot of deal interest, underwriting and negotiations last year. But honestly, the uncertain economic environment made it hard to actually close the deals.”

Foreign investors have pulled back for a variety of reasons, not the least of which is to shore up their own portfolio allocations and values from the aftershocks of rising interest rates, CBRE Vice Chairman Will Yowell said.  

“[Foreign investors] are very focused on taking care of legacy issues and legacy portfolios,” Yowell said. “So there's a lot of internal, ‘Hey, let's address some of the issues we have with our internal portfolio.’”   

According to preliminary full-year MSCI data, the most active sources of cross-border investment in 2023 were Singapore, Canada and Japan, with Singapore investors pumping more than $10B into the U.S. property market, making up more than 34% of all international U.S. CRE investments in 2023.

In late December, an entity connected to the Prada family purchased its flagship Manhattan store at 724 Fifth Ave. for $425M and 720 Fifth Ave. next door for $410M, Bloomberg reported. The purchases made Italy the seventh-largest source of cross-border U.S. investment in 2023 after placing 24th in 2022.

Japanese investors put $3.7B into U.S. commercial real estate as of early December, their largest volume of capital into the U.S. since 2016, The Wall Street Journal reported, citing MSCI data.

Tokyo-based Mori Trust Group led the charge, purchasing a $700M stake in 245 Park Ave. in Manhattan from majority owner SL Green. It also paid Boston Properties more than $500M in September 2022 for a trophy D.C. office building.

Japanese investors are moving first back into the market, Costello said, in part because the return to offices has been so strong in Japan. Xu attributed the influx of Japanese investors to the relative strength of the yen. 

Their purchases also signal what types of properties other global investors will be interested in purchasing when they return to the market. 

“If I’m going to hop on a plane and look at assets, I want to be able to write a $50M check,” Costello said. 

Trophy buildings, even office buildings amid concerns over the future of work, are the best places to do that.

“There’s already a bit of demand for that, but there’s not willing sellers,” Yowell said. “When those institutions come back, and I think they will, that’s where the capital will be focused. They will be focused on the core trophy assets.” 

In August, Orlando, Florida-based Estein USA purchased the Three Ravinia Drive office tower in suburban Atlanta from Blackstone for $175M, using capital raised from its German investors, Yowell told Bisnow. 

Much of the activity to this point has been from those types of high net worth investors rather than the institutional wealth funds, Yowell said. 

“We’re seeing that private capital step up,” he said. 

Half of global real estate investment firm chief financial officers surveyed by Deloitte said they expect the cost of capital and capital availability to worsen throughout the year. They said their chief concerns are the continued war in Ukraine, extreme weather events and weaker-than-expected economic recovery in China.

“It doesn’t matter if it was New York, Tokyo or London,” Costello said. “Nobody wants to overpay for an asset.”

Adam Omar Al-Shanti, who invests on behalf of investors based in the Middle East into commercial properties in the U.S., Saudi Arabia and the United Arab Emirates, said his investors are more focused on keeping their money close to home.

Al-Shanti plans to close on $100M of high-end hotels and rental properties in Dubai and Saudi Arabia rather than shopping in the U.S. Yields on commercial real estate investments there are stronger than in the U.S., fueled by government spending, by high global oil prices and by an influx of young Russians and Ukrainians to the region, Al-Shanti said.

He said his investors expect U.S. prices to keep dropping, especially in the office buildings that they prefer to buy. There is more than $115B of U.S. office debt expected to mature this year, which could force some owners into sales. 

“I would expect that institutional investors are probably interested if there’s something they can scoop up at highly attractive prices,” Al-Shanti said. “Their perspective is that things haven’t bottomed out yet.”

Xu said investors active in the market today are “mostly like bottom fishers” attempting to buy properties at discounted prices.  

Yowell also said some foreign investors are scouting the U.S. property markets for distressed deals, especially coming from countries where yield is more difficult to generate.

“The Japanese might be more on the front end [of the cycle] this time around,” he said.

Despite the pockets of interest, Costello said he expects foreign institutional investors to be out of the market for some time out of fear of making poor investment decisions.

“The cost of being wrong is that you don’t get a chance to raise the next fund because everybody remembers how you called it wrong on the market timing,” he said. “The institutional and cross-border capital might be down for a bit. By the time they’re back, the market is already back.”