Foreign Investors Return To U.S. Office With Sixfold Jump In Spending

Office hasn’t been front of mind for many foreign investors looking at U.S. CRE in recent years, but with the pandemic squarely in the rearview mirror, that is starting to change.

Cross-border investments in the U.S. office sector last quarter increased sixfold year-over-year to $877M, according CBRE. Although that was less than the $1.6B and $1.5B allocated to U.S. industrial and multifamily last quarter, respectively, and well below prepandemic levels, the trend is still turning heads.

“January of last year, people were office-averse,” CBRE Capital Markets Chairman William Shanahan said. “By third or fourth quarter last year, people were office-curious. This year they’re office-serious.”

Foreign investors are usually most interested in large office properties in major urban markets, Association of Foreign Investors in Real Estate CEO Gunnar Branson said.

This has been a boon for New York City in particular. The longtime destination for foreign capital remained No. 1 for cross-border CRE investment last quarter, according to CBRE. These transactions were focused on the top 10% to 20% of office buildings in the submarket as foreign investors seek to cash in on tenants’ flight to quality.

“We’re in an environment where you’re running out of trophy and Class-A office product,” Branson said of Manhattan.

Shanahan said cross-border investors are also bullish on the office sector in greater San Francisco, which was the No. 2 destination for foreign capital in the year leading up to Q4.

While the Bay Area fielded a litany of negative headlines during the pandemic, the artificial intelligence boom has contributed to increased tech leasing in recent months. These tech companies would rather be located in San Francisco proper than remote Silicon Valley campuses, Shanahan said.

“A lot of the employees live in San Francisco and work on the Peninsula,” he said.

The tech industry’s reorientation toward the metro area’s historic core has led to “a much better commute for its employees,” he added.

Increased interest in the San Francisco office market is roughly two years behind the revitalization seen in the New York City office sector, Shanahan said. He added that other major metros like Boston, Dallas and Washington, D.C., are up next.

“Washington is coming around quickly,” Shanahan said. “You’re going to start seeing new office construction in D.C. in the next 12 to 24 months.”

Cross-border investment in U.S. office last quarter is still just a fraction of the roughly $6B invested in Q3 2018 and the $4B in Q3 2019, according to CBRE.

The drop in activity is due to more than just the pandemic and the remote work trend. The bellicose trade rhetoric that has often defined the last decade of American foreign policy has turned some people off.

“Foreign investment in office started dropping off in 2016 because of the anti-Chinese sentiment,” Shanahan said.

China was consistently among the top origin points for foreign investments between 2012 and 2016, before President Donald Trump first took office. That activity is now “almost nonexistent,” Shanahan said.

There is still a lack of clarity around the future of foreign investment in U.S. CRE. 

The White House’s erratic trade policies are a cause for concern even as some view revaluations as a turning point for the market, Branson said.

CBRE found that overall cross-border investment in U.S. real estate last quarter was down 35% year-over-year to $4.7B, but it says that is due to two large deals in Q3 2024. Comparing the 12-month period ending Sept. 30 to the prior year, it found cross-border investment volume increased by 15%. 

Global institutional real estate investor advocacy group AFIRE’s second-half pulse report, based on a survey of its members, showed mixed sentiments.

Forty-seven percent of respondents expressed optimism about the U.S. economy’s recovery, up 20% from the organization’s survey in the first half of the year. Another 44% said they were unsure about the market’s trajectory, up 6% from the previous report.

Only about 20% of respondents said foreign investment in U.S. CRE will increase over the next 12 to 18 months, while 50% believe it will decrease.

Canada was the No. 1 source of foreign capital entering U.S. CRE last quarter, according to CBRE. Yet AFIRE found that 60% of respondents predicted decreased investment from Canada in the U.S. over the next 12 to 18 months.

Relations between Canada and the U.S. soured last week after Trump axed trade talks in response to antitariff commercials Ontario Premier Doug Ford aired in the U.S.

Shanahan said he doesn’t believe the Canadian CRE sector is large enough to sustain the amount of money its investors want to deploy.

“The big pension funds in Canada are overinvested in Canada,” he said.

If they don’t invest in the U.S., Canadian investment vehicles will need to send their money to Europe or Asia instead.

“Generally speaking, what I get from a lot of Canadian investors is less a sense of game over and more a sense of pause,” Branson said.

He said the U.S. is destined to remain a major destination for foreign real estate investment.

“The United States is a big and deep market,” he said. “That is attractive no matter what kind of shifts there may be.”