Cross-Border Capital Drives Record U.S. Commercial Real Estate Volumes
JLL Notes Volatility in Global Markets Is Not Expected to Deter Foreign Investment
The stock markets led investors on a turbulent ride at the end of 2015 and the beginning of 2016, with the Dow Jones Industrial Average dropping more than 1,400 points in just the first two weeks of the year. However, that volatility appears to be avoiding the commercial real estate industry, especially when it comes to cross-border investment in the United States.
"While we're seeing volatility and uncertainty in parts of the financial markets, the relative strength of economic and leasing fundamentals continues to position the United States as an attractive, healthy and transparent market for cross-border investment," said Steve Collins, International Director and President of JLL Capital Markets - Americas. "This is reinforced by a compressed global yield environment seeing low, or in some cases, negative yields."
According to JLL's U.S. Investment Outlook, cross-border transactions increased more than 150 percent year-over-year in 2015 to a record $71.7 billion. That surpasses the 2007 record by more than $30 billion. With this, foreign partial interests have averaged 27.4 percent over the last five years, nearly double the pace of similar transactions in 2005-2007.
While this influx of foreign cash has gone largely to the industrial, office and hotels sectors, all sectors felt the cross-border impact.
Foreign capital launches industrial into record fourth quarter
For the first time in history, the industrial sector usurped office as the number one destination for cross-border transactions, lapping up 36.1 percent ($25.9 billion) of total offshore capital.
JLL research shows that Asian investors spurred much of that industrial growth. Singapore-based investors accounted for $12.7 billion in offshore capital alone.
"Foreign investors are seeing an opportunity to make portfolio investments in the industrial sector, especially as spreads between U.S. commercial assets and global 'risk-free' rates continue to remain healthy," said John Huguenard, International Director and leader of JLL Industrial Capital Markets.
However, JLL predicts that as sovereign wealth funds and pension funds continue to pour capital into the U.S. industrial market and syndicate down to minority interests -- specifically with portfolio deals -- sales next year will still be up over 2014, but down from 2015's record-breaking haul.
Some key takeaways:
Office boosted as foreign investors dig deep into primary markets
The office sector saw triple-digit year-over-year investment increases in 2015, up 126 percent. Five countries -- Canada, China, South Korea, Germany and Norway -- accounted for 81 percent of total foreign investment volume.
While the source remained the same, the destination bucked trends. Investors dug deeper into primary markets and were willing to settle for less than Class A and Trophy assets, which were priced 32 percent higher year over year. As a result, Class B asset acquisitions by foreign buyers increased 7.3 percent over 2014.
Secondary markets benefitted from limited supply in the Central Business Districts and saw foreign investment reach $2.2 billion. This migration to secondary office markets remains selectively focused on high-growth markets and, even more so, specific asset profiles.
While lagging peer sectors, multifamily sees historic influx of offshore capital in 2015
The multifamily sector also had an unprecedented year in 2015, a trend that shows no signs of diminishing in 2016. Also remarkable was the ratio of cross-border capital in the sector which rose to 7.2 percent, or $8.6 billion. That's a 79.6 percent year-over-year increase, 65 percent of which was invested in the second half of 2015.
Canada accounted for 58 percent of all cross-border apartment transactions while the Middle East was second most active at 14 percent. Growth was especially apparent in New York and Washington, D.C., where investors showed a particular appetite for Trophy assets.
"As foreign investors look to the United States, they continue to seek assets that are familiar to them such as Class A Trophy assets in the multifamily sector," said Lucy Fletcher, Managing Director with JLL's International Capital Group. "This is especially true in larger markets where job growth has been consistent."
Private foreign investors focus on urban high street retail assets
While the big players are wary of the lack of opportunities to achieve scale in the urban high street market, private foreign investors have been drawn to the slew of single asset transactions.
Of the offshore investors who spent in aggregate less than $50 million in 2015, 81.1 percent of the transactions were private, with the majority focused on primary markets where retail space cannot easily be scaled for larger institutional investors. Heading into 2016, foreign investors will stay picky about where they put their capital in the retail sector, targeting investments of scale in the Class A mall and urban retail segments.
International travelers skip United States, but offshore cash highlights big Q4 buys
A strong U.S. dollar and weak economic growth abroad meant a softening market of international travelers into the United States for 2015, but international investment dollars into the lodging sector proved robust.
Once again foreign investors were after Trophy assets, a trend highlighted by two marquee transactions: A South Korean investor's purchase of the New York Palace for $805 million and the Fairmont San Francisco for $450 million, and a Chinese investor's purchase of the Waldorf Astoria New York for a whopping $2 billion.
Foreign investors' willingness to buy Trophy assets like the Waldorf and Palace at exceedingly low cap rates has pushed the cap rate outlook for 2016 to near-record lows, though JLL's Hotel Investor Sentiment Survey predicts that cap rates will shoot up again for the first six months of 2016.
JLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The team provides in-depth local market and global investor knowledge delivering the best-in-class solutions for clients -- whether a sale, financing, repositioning, advisory or recapitalization execution. In 2015 alone, JLL Capital Markets completed $140 billion in investment sale and debt and equity transactions globally. The team comprises more than 2,000 specialists, operating all over the globe.
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JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $5.2 billion and gross revenue of $6.0 billion, JLL has more than 230 corporate offices, operates in more than 80 countries and has a global workforce of more than 60,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in 2015. Its investment management business, LaSalle Investment Management, has $56.4 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.