What Global Investors See in US Commercial Real Estate

A little less than half of the world’s institutional quality real estate sits in the United States. For a pension plan in Canada, a sovereign wealth fund in the Middle East, or an insurance company in Japan, that makes the US very hard to leave out of a global strategy. The more useful question is how those investors feel about the US right now, and where their next dollar is going.

To answer it, I welcomed Gunnar Branson, CEO of AFIRE, the Association of Foreign Investors in Real Estate, back to America’s Commercial Real Estate Show. Twice a year AFIRE surveys its members, institutional investors from 24 countries, on their US activity, concerns, risks, and opportunities.

His read on the mid-year Pulse is that global capital remains committed to the US for the long term, but it is moving toward infrastructure and energy, getting more selective about office, and watching politics closely.

Capital Turns Toward Infrastructure and Energy

Gunnar was candid that commercial real estate has had a rough couple of years for institutions. Yields have come in below what investors expected when they raised the capital, and the asset class is less favored than it was two years ago. As these firms rebalance across every asset class, their infrastructure departments are getting more active, and the largest single target is a real estate product: data center development across the United States.

That pull has created a second shift. Data center developers increasingly have to build energy infrastructure just to get a site powered, and Gunnar said that for the first time a majority of AFIRE’s respondents named energy as one of their major concerns when choosing where to invest. Many now invest in energy directly, from gas-fired plants that come to market faster to solar and battery storage. Respondents rated data centers among the best opportunities and also among the greatest risks, with only office rated riskier.

Office Climbs the Wish List

For three or four years the favorite property types have been beds and sheds. That has held this year, with one notable change.

• Industrial: Still at the top of everyone’s wish list, helped by the push to expand US manufacturing.
• Multifamily: Right behind industrial, driven by a housing shortage that institutions see in nearly every advanced economy.
• Office: Now number 3. Banks are getting less patient and accepting repricing, good deals are surfacing, and in New York there has been almost no Class A space available for more than a year.
• Europe and the Middle East: Investors from both regions are holding what they own and slowing new acquisitions. Gunnar described it as a pause in new investment, with little actual selling.

Office Is Following Retail’s Comeback

I have said on the show many times that I think office is the buy of the decade, and that it will recover faster than most expect. Gunnar pointed to retail as the model. Brick and mortar retail was declared dead only a few years ago. Then the market removed a lot of supply, smart operators repositioned what remained, and today retail is the darling again. He sees the same pattern starting in office, with conversions to multifamily in New York and Washington, DC thinning out buildings that no longer compete.

The winners will sit in mixed-use neighborhoods where people live, work, and play, places that stay active around the clock. The single-use downtowns built over the past 50 years are struggling by comparison. Gunnar’s caution was that plenty of B and C buildings will need significant capital, and broken capital stacks still have losses to absorb. His summary: office is the best buy if you are careful.

A low basis is a big part of being careful. I’m bringing to market an office tower of almost 200,000 square feet that a buyer can acquire for about $64 a foot, and we also have an office building in Buckhead at around $160 a foot. With very little new office being built and older inventory being torn down or converted, it is hard to go wrong long term at that kind of basis.

Strong Fundamentals, Uneasy Politics

AFIRE members hold two views of the US at once. On GDP, demographics, labor, and employment, sentiment is very positive.

• Political Risk: 90% of respondents see politics, both US and global, as a negative force on investment strategy.
• Rates and Inflation: Gunnar noted that the industry has made great investments in periods when rates were higher than today. Volatility, more than the level of rates, is what makes deals hard to pencil.
• Long-Term Conviction: 94% say this is a time for long-term thinking and long-term investing, even with the volatility of the moment.
• Currency: Japanese institutions are putting far more capital into US single family and multifamily than they did five years ago. Asked about the weak yen, most tell Gunnar it will wash out over time because they have no plans to convert back.

Why the US Is Hard to Leave Out

Beyond the size of the market, Gunnar listed advantages the US has held for decades. Most countries offer one or two attractive cities; the US easily offers a dozen, from New York and Los Angeles to secondary markets like Nashville, Austin, and Atlanta. Inside one currency, one legal system, and one transparent market, an investor can pursue what amounts to four or five countries’ worth of strategies.

There are concerns. Tariffs are moving quickly, and tighter immigration is already reducing construction labor and raising building costs in some markets. Gunnar also raised a point that gets little attention: cross-border investors tend to invest where they and their children went to college, because that is where they built their networks. Some elite university real estate programs have had students unable to arrive because of visa issues, which could shape capital flows for a generation.

Where Institutional Capital Wants In on Housing

Nearly every institution Gunnar talks to wants to help solve the housing shortage, whether through subsidized affordable housing or market-rate workforce product. Asked how, his answer was all of the above. Single family rentals and build-to-rent provide professionally managed homes for families who are not ready to buy. We are selling build-to-rent subdivisions in the Southeast, and when I walk those homes, they are homes I would be happy to live in myself. Manufactured housing has a role too, and the recent removal of the US requirement for a permanent chassis under every manufactured home should help here.

The pressure is building. The share of AFIRE respondents who believe households are at the breaking point rose from about 11% to 19% in a year, and the share who see households one problem away from it rose from 49% to 55%. Gunnar’s message to cities was practical: if it takes two to five years to get a building out of the ground, supply will lag demand.

Final Thoughts: Location Still Moves

I got into this business at 19, and location, location, location still holds. Gunnar’s point is that location itself shifts over time. I was selling Midtown Atlanta about 25 years ago, and it was a much tougher sell than it is today. Global investors favor growing, active metros with strong social and economic life, and Atlanta fits that profile. Some of my investors will pass on a 9 cap deal in a smaller market and accept a 6 or 7 cap closer to Atlanta. As Gunnar put it, real estate is the economy inside a box. Investors who follow the demand and look past today’s volatility will likely be pleased with the next 10 years.

Have a Commercial Real Estate Strategy to Discuss?

With more than $8 billion in closed commercial real estate transactions, Michael Bull, CCIM, brings extensive transaction and market expertise to owners, investors, and companies across the United States. As host of America’s Commercial Real Estate Show and an active commercial real estate broker with a strong presence in Atlanta and markets throughout the Southeast, Michael offers experienced perspective on property strategies, market conditions, acquisitions, dispositions, and other commercial real estate opportunities.

Contact Michael to discuss your commercial real estate objectives.

Michael Bull, CCIM
Michael@BullRealty.com
404-876-1640 x 101