US Still Best Bet for Commercial Property Investors, According to Report
by Brian Klebash
NEW YORK, New York – Continued low interest rates have made commercial real estate yields in the US more attractive for institutional investors around the globe, according to JLL consultant Chris Fossick who spoke earlier to CNBC. The JLL Investment Intensity Index compares the volume of direct commercial real estate investment over a three-year period to the city’s GDP. Released this week, the report showed cities in North America topping the list of preferred sites, while New York topped the list when it comes to absolution volume and yield, Fossick said.
Additionally, Chinese investors were the largest foreign investors in commercial real estate in the U.S. last year, with deal volumes reaching $19.2 billion, up 10 percent from $17.3 billion in 2015, according to a recent report from Cushman & Wakefield. Chinese investors made up nearly thirty percent of total foreign investments in US commercial real estate edging out Canadian investors at $13.1 billion. 62 percent of Chinese transactions in 2016 were over $1 billion in deals. The largest deals were executed by Chinese insurance companies, which use up to 15 percent of their assets to target foreign investments.
The US coastlines have been the primary targets of Chinese investments, according to Forbes. That trend continued last year with New York City receiving 46 percent of total Chinese investment, while the San Francisco Bay Area received fifteen percent, Los Angeles seven percent, Chicago five percent, and Seattle at two percent. Manhattan was the most popular target of the Chinese investments realizing over 60 percent of the capital going into office buildings.
According to a U.S. Department of Commerce study the US remains attractive because of a large consumer base, a productive workforce, a highly innovative environment, and legal protections. But the low interest rates are surely a large factor in the decisions to remain in US property. And the boom may continue even after rates are hiked, as little impact is imminent on deals in the size and scope seen in the past 24 months.
Yet an investor survey by CRBE released earlier this month found that fewer property investors were intending to invest more capital in 2017, with only 37 percent intending to buy more, down from 42 percent last year. This hesitation is probably due to rapid interest rate hikes predicted to occur in the US over the next six quarters, as well as yield spreads. CBRE surveyed more than 500 institutional investors, including asset managers, developers, REITs, private equity, sovereign wealth funds and individuals, who were interested in Asia real estate.
The focus on yield gap replaced a previous emphasis on capital appreciation, according to the report. The CRBE report also showed that fewer property investors were worried about a global economic shock, down to 25 percent from 46 percent last year, but many remain worried that interest rates might rise faster than expected.