Foreign investors have played an integral part in returning the U.S. housing market to its pre-recession prominence. That is not to say that the housing sector is completely recovered, but it is safe to assume that we would not have made it to where we are today without the aid of foreign investors. Cities like Miami, New York and Los Angeles have each benefited from the presence of foreign investors looking to make a name for themselves. Of particular interest, however, is the direction said investments are heading. No longer are foreign investors content with paying top dollar for buy-and-hold properties. That said; investors from other countries are increasingly becoming active in new construction. Development projects appear to be the hottest real estate trend for overseas investors.
The most recent, prominent example of a new development project being funded by an overseas company can be found in Manhattan’s far West Side. It is there that Mitsui Fudosan Co., a Japanese developer, recently completed plans to build an office tower valued at $1.4 billion. In addition to the building costs, Mitsui Fudosan Co. fronted New York-based Related Cos. $259 million, as to claim a 92% stake of 55 Hudson Yards. Again, this is a far cry from what we have come accustomed to with foreign investor activity. It wasn’t long ago that overseas investors were more interested in existing properties. Nevertheless, it appears as if their priorities are changing.
The deal at 55 Hudson Yards represents a shift in the entire development landscape. Perhaps even more importantly, major U.S. cities are starting to notice the trend. What was once a landscape dominated by local, institutional investors is now open to the rest of the world. No longer are U.S. property tycoons the only players. Foreign developers from a number of different countries are heading a large portion of the most ground braking projects. How are they doing it? They are simply outbidding the competition. Relatively unknown, but well-funded, companies are finding value in U.S. soil that they can’t get where they come from.
“We’ve seen more new names, new faces, new investors with large capacity in the last two years than we’ve seen at any other time,” said Jeff Blau, chief executive of privately held Related, one of the country’s largest commercial developers.
For all intents and purposes, overseas investors have increased their interest in U.S. commercial real estate. In fact, last year marked the largest amount of foreign capital to enter the U.S. commercial real estate sector in more than 8 years. Accordingly, 2014 was the recipient of $45 billion handed over by foreign investors. That is the second highest amount of foreign investments in U.S. commercial real estate since 2007, when overseas investors infused the economy with $47 billion.
Foreign interest isn’t stopping in New York either. In Los Angeles, the owners of Korean Air have broken ground on a rather imposing project. The proposed hotel is going to be the tallest building on the West Coast. Not to be outdone, other investors have taken up locations in popular cities like San Francisco and Seattle. The projects are certainly not modest. There is a lot of money to be made and other countries know it.
Again, foreign investors are finding lucrative opportunities in nearly every major metropolitan area. However, New York remains the jewel of the commercial real estate sector. Nowhere else in the country has seen more foreign activity, not even Miami – which is practically an export economy. But why New York? The answer may not surprise you. Simply put; New York office buildings provide a great return on investment (ROI). Office buildings in New York, in particular, tend to generate upwards of 5% of their purchase price each year. However, as we mentioned, foreign investors aren’t pursuing buy-and hold-opportunities – they are funding development projects. These types of investments generate returns of at least 7 percent of the purchase price.
The recent push towards new development projects can be attributed to the need to diversify. Chinese investors, in particular, have found it increasingly difficult to secure wealth-building assets in their country, so they have turned to the U.S. to diversify and expand their portfolios. Having said that, the Chinese market is beginning to show sings of a potential bubble. Investors from China are, therefore, willing to pay top-dollar for properties on U.S. soil. The spreads here are simply much better than where they come from.
What’s more, the trend of foreign investor interest in new development projects appears to be trending upwards. U.S. investors should expect to see more of the same thing, at least through 2015.