Foreign Investment In U.S. CRE Tumbles To Lowest Point Since 2011

Interest from international investors in commercial real estate assets in the U.S. fell by more than two thirds in just one year, as the slump in prices and transaction activity has taken its toll on cross-border investment.

Foreign investors spent $5B on U.S. commercial properties in the first three months of the year, according to MSCI Real Assets data provided to Bisnow, down from $15B in the first quarter of 2023. The last time international investors spent that little money on U.S. CRE was Q3 2011.

The nosedive in foreign investment mirrors the moribund investment market overall, as owners have demonstrated a continued reluctance to sell while valuations are low and borrowing costs are high.  

“If I'm a current owner and I'm thinking about selling and I think to myself, ‘Well, rates might be a bit lower in the future, I might be able to get a better deal in the near future,’” Jim Costello, chief economist at MSCI Real Assets, said in an interview. “So unless somebody forces me to, I'm not going to sell.” 

Some of the pullback has been from investors in the Asia-Pacific region, with some expressing more interest in investing in U.S. debt funds than directly buying property, Costello said. 

Even in a slower market, international investors are still acquiring a historically low share of properties, making up just 6% of the overall volume in the first quarter, according to MSCI, just the second time since 2009 that share has fallen below 7%.

In the past two years, the most consistently active investors outside of perennial leader Canada have hailed from Singapore and Japan. Singaporean investors have bought $2.7B worth of commercial properties over the past four quarters, while Japanese buyers have invested $2.3B over the same period.

Some of the strong activity from Japan is due to the yen’s recent weakening, Cushman & Wakefield Global Capital Placement Director for Capital Markets Cecilia Xu said.

“If a few years ago they bought deals in the U.S., it now seems like it's performing even better because of the exchange rate difference now,” she said. “So it seems like they're making more money on those deals.”

That also leads to a more positive view of the commercial real estate market in the U.S. compared to foreign investors’ domestic markets, she said. But they are also hunting for bargains before prices start to rise, a sentiment that is also motivating European investors, which is the only group looking at office assets in the U.S., she added. 

“They think now is the downtime for the U.S.,” Xu said. 

The relatively paltry investment means that single transactions have significantly shifted which countries are the biggest investors in U.S. property markets, Costello said.

Kering, the French parent company of Gucci, splashed out almost $1B in mid-January on three retail condos at 715-717 Fifth Ave. in Manhattan. The purchase boosted France to the fourth-biggest investor in U.S. commercial real estate in the past 12 months, up from 12th in 2022.

Prada’s $835M purchase of 720 and 724 Fifth Ave. in late 2023 was enough to elevate Italy from the 37th-biggest investor in U.S. commercial real estate to seventh over the past year. And when Spanish billionaire Amancio Ortega’s Ponte Gadea acquired a multifamily building in August for $231.5M in Chicago’s West Loop, that was big enough to boost Spain from the 24th-biggest investor in U.S. commercial real estate in 2022 to fifth.

Many European investors are trying to capitalize on assets at a low point in the cycle by snapping up distressed offices in central business districts in large U.S. metro areas, Costello said. At the end of Q4 2022, office sales accounted for just 10% of commercial real estate assets acquired by foreign investors. By the end of Q1 this year, that figure was 28%. 

“They've got deep pockets,” he said. “They're doing stuff that domestic investors won’t do.”

Making moves that domestic investors aren’t as keen on has increasingly meant snapping up real estate in more traditional markets. Three of MSCI’s top five markets were cities experiencing serious distress in their office sectors: Manhattan recorded more than $5B in acquisitions by foreign investors, Boston reeled in $2B, and San Francisco reached $815M. 

But in the longer term, foreign investment may not start swinging upward until U.S. interest rates shift, Costello said. 

“People know that at some point, interest rates are going to come down. That changes the behavior for both buyers and sellers,” he said, adding that distress will be the catalyst for sales until borrowing gets cheaper. “It's going to improve at some point based on when somebody capitulates.”

CORRECTION, JUNE 28, 5 P.M. ET: A previous version of this story incorrectly stated the amount invested by global investors in U.S. CRE in the first quarter of 2024. This story has been updated.