The United States economy has experienced a volatile run over the past two years. While the past few months have seen an increase in momentum for the job market, ephemeral economic momentum in 2010 and 2011 has given employers ample reason to hire cautiously in 2012. Consumer activity, which constitutes 70 percent of the domestic economy, has been building slowly – but memories of the 2007-2008 financial crash and the resulting consumer credit issues remain fresh. Compounding all of this economic uncertainty are Federal austerity measures, which are set to be implemented in 2013 as a result of the failed Congressional supercommittee that was charged with trimming the nation's debt. Yet, for all of this uneasiness about the U.S. economy, foreign investment in U.S. commercial real estate remains robust. Why?
At the peak of the market in 2007, foreign buyers spent $25.3 billion snapping up U.S. commercial real estate assets, according to Real Capital Analytics. This represented 6.1 percent of the total sales volume. The net acquisition dollar volume (the amount spent on acquisitions by foreign buyers minus the amount received from sales by foreign sellers) was $8.4 billion.
Fast-forward to early 2012. The nation has passed through a severe recession, the loss of over eight million U.S. jobs, extreme turbulence in the financial services industry, and a debt ceiling crisis that led to the downgrading of the U.S. government's credit. We are now in a protracted economic recovery. How do foreign buyers feel about U.S. commercial real estate today? In 2011, foreign buyers spent $19.8 billion on U.S. commercial assets, or 9.6 percent of the total sales volume. Net acquisition dollar volume was $7 billion. Foreign investors are not scared of economic uncertainty in the U.S. To the contrary – they are looking to get back into the U.S. commercial markets in a big way.
Foreign capital remains attracted to U.S. assets for several reasons:
1. Relative to other potential investment markets, such as Europe (with its sovereign debt crises) and Asia (with its currency valuation issues and decelerating economic growth), the U.S. remains a safe haven.
2. Both the job market and consumer spending in the U.S. have demonstrated meaningful (though uneven) growth during the past year. The U.S. economy added 2.0 million payroll jobs during the 12 months ending in February 2012 and consumer spending rose 2.2 percent in 2011 compared to 2010.
3. The U.S. commercial markets were not overbuilt during the most recent downturn, at least not compared to prior recessions. For example, 96 million square feet of office space was under construction nationally when the Great Recession ended at mid-year 2009, which represented 1.2 percent of the existing inventory. This compares to 155.8 million square feet under construction (2.3 percent of the U.S. inventory) at year-end 2001, just after the end of the prior recession. Information, due in large part to improved technology, is better and developers are able to exert more discipline today than they were a decade ago.
Despite the slow recovery due to uncertainty that persists in the American economy, foreign investors are bullish on U.S. commercial real estate assets. For owners of U.S. assets, that means a broader audience when assets are brought to market; greater competition should push prices higher as the economic recovery gains strength. For tenants, be aware that a change in ownership at a higher cost basis could portend higher rents with less capital available for improvements in the years ahead. This suggests an action plan sooner rather than later.
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