As the World Snaps Up U.S. Real Estate, Are Bubble Fears Overblown?

With foreign investors approaching record purchases of commercial property in U.S. cities, conditions may not be as frothy as they appear.


Michael Nagle

At home, Canadian real estate investor Armin Martens faces a soft economy and a declining currency. But when he looks south of the border, the president and CEO of Winnipeg, Manitoba–based Artis Real Estate Investment Trust sees a commercial property market teeming with opportunity.

“The U.S. is not just the largest economy in the world; it’s not just the largest real estate market in the world; it’s also the best-performing,” says Martens, whose firm owns C$5.4 billion ($4.07 billion) worth of properties there and in Canada. “Today’s outlook in the U.S. is very good.”

Publicly traded U.S. real estate investment trusts generated profits of $13.4 billion in the third quarter of 2015, up 13.1 percent from $11.8 billion during the same period in 2014, according to the Washington-based National Association of Real Estate Investment Trusts.

Artis is one of many international investors buying into the country’s hot real estate market, a trend that has prompted whispers of frothy conditions.

Foreign investors spent $84.6 billion on U.S. real estate in the first ten months of 2015, according to Real Capital Analytics. That investment is on pace to eclipse the previous record, set in 2007, says Jim Costello, senior vice president at the New York–based research firm.

Through September, 14 percent of U.S. commercial real estate investment came from abroad, versus 10 percent for the same period in 2014, reports CBRE Group, a commercial real estate brokerage based in Los Angeles.


“The world loves the U.S., and they’re continuing to put money into this market,” says Jeanette Rice, Dallas-based head of investment research for the Americas at CBRE. “The U.S. is fairly stable. We have our economic ups and downs, but overall the economic cycles are somewhat predictable.”

In one recent splashy deal, Middle Eastern sovereign wealth fund the Qatar Investment Authority bought 44 percent of New York’s $8.6 billion Manhattan West development from Brookfield Property Partners, a division of Toronto-based Brookfield Asset Management.

This past summer Spanish billionaire Amancio Ortega, head of fashion brand Zara, ponied up $370 million through his real estate investment arm for a block of Miami Beach’s Lincoln Road, the second-largest deal in Miami-Dade County history. In March, Ortega’s company paid $176 million for the former Esquire Theater in Chicago.

Last year Beijing-based Anbang Insurance Group Co. paid $1.95 billion for the Waldorf Astoria New York hotel in Manhattan. Since Chinese insurance regulators allowed carriers to move investments outside the country, Chinese insurers have emerged as active buyers, Costello explains.

Even after a flurry of activity, Chinese managers must keep diversifying their portfolios. “They’re horribly overweighted to China right now, so I think that outflow will continue,” Costello says.

Some worry about an influx of Chinese money. “The Chinese savings glut has fully disrupted global financial markets,” says Morris Davis, academic director of the Center for Real Estate at Rutgers Business School in Newark, New Jersey. “I have no idea how this ends, but these things typically don’t end well.” In 1989, Japan’s Mitsubishi Estate Co. bought 80 percent of New York’s Rockefeller Center, only to jettison its $2 billion stake in the mid-1990s when the landmark building filed for bankruptcy.

But Costello says there’s so much international capital chasing U.S. real estate that the financial fate of any one nation poses no real threat. “If Chinese buyers were to disappear, I don’t think prices would collapse,” he contends. “There are plenty of domestic buyers right behind them hungry for the same yield opportunities.”

Although cash from exotic locales grabs headlines, skeptics should probably be more worried about Canadian investors, the most active buyers by far. Canucks spent $23.6 billion on U.S. real estate in the first ten months of 2015, followed by $14.8 billion from Singapore, $9.3 billion from Norway and $6.4 billion from China, Real Capital Analytics reports.

Artis’s Martens says that 28 percent of the landlord’s assets are invested stateside, a proportion that it expects to hit 35 percent by the end of 2016. With falling petroleum prices hurting Canada’s oil-sensitive economy and property market, collecting rents in U.S. dollars provides a hedge, he adds.

The Canadian dollar has weakened along with oil — as of late November it was trading at about 75 cents U.S. — and Artis has benefited from the favorable exchange rate. Although Martens says the faltering loonie “gives cause for pause,” his REIT is sticking with its strategy.

Tellingly, Artis isn’t focusing on New York and San Francisco, the first stops for deep-pocketed foreign investors. It’s targeting Arizona, Colorado, Minnesota and Texas.

Secondary U.S. markets appeal to investors in a way that lower-tier markets in other nations don’t, says Ryan Severino, director of research at Reis, a real estate data firm in New York. An investor that finds London prices too dear wouldn’t look to Liverpool or Manchester, but foreign players shopping in the U.S. aren’t shy about turning to Atlanta or Seattle for cheaper alternatives.

Also, secondary markets can offer better capitalization rates — a property’s annual income divided by its purchase price — which fall as values rise. “Because we have more land and buildings available for sale, cap rates in the U.S. are higher than in other parts of the world,” Severino says.

The latest wave of foreign investment has caused little hand-wringing over America’s place as an economic superpower. That’s in stark contrast to the national soul-searching that ensued after Japanese investors snapped up Rockefeller Center and California’s Pebble Beach a quarter century ago.

“It seems silly in retrospect,” CBRE’s Rice says. “We are in a much more global world now, and we are so much more connected with other markets.”

Still, Costello notes that there remains one area of geopolitical sensitivity: Middle Eastern investors take pains to disguise their purchases of U.S. properties.