Foreign Investors Target US Core Assets

Since the Federal Reserve reduced rates at the beginning of the COVID-19 pandemic, hedging costs have come down for foreign investors.

“That [hedging] is the cost of insuring against the movement in the currency that’s being invested versus the dollar,” says Alex Foshay, vice chairman and head of Newmark Capital Markets’ International Capital Markets Division. “Institutions in many countries around the world that are investing in the US are required by law to hedge the equity portion of their investment, most notably Korean institutions and German open-ended funds.”

That led to increased international investment into the US commercial real estate market, according to Foshay. In a pandemic year, when investment volumes declined overall, some countries stood out.

Leading the way were investors from South Korea, Singapore, Germany (through open-ended funds) and the Middle East, according to Foshay. He says Korean institutions were up 93% in equity investment in US commercial real estate versus 2019. Singaporean groups have increased their investment by 17% over the same period.

Not surprisingly, these international groups are most interested in logistics, given the strength in e-commerce. They also like multifamily, according to Foshay. But other sectors are also capturing their attention.

“Life sciences is also greatly in demand as is data centers, but those are asset classes that are relatively new to overseas investors,” Foshay says. “In many cases, they [international investors] are educating themselves on those markets.”

Right now, these international investors are primarily focused on core assets, according to Foshay. “There is a flight to safety mentality,” he says. “They are seeking trophy or prime properties in very high-quality locations that are leased to credit tenants, preferably over 10 years. That is where we’ve seen the vast majority of overseas investment activity.”

One recent deal demonstrates those preferences. At the end of 2019, Newmark closed 1918 8th Avenue in Seattle, a trophy tower leased to Amazon for 10 years, in a $625-million transaction. The seller was JP Morgan, and the buyer was The Canada Pension Plan (CPP). Four Korean groups and one Singaporean bidder were also pursuing the deal.

“CPP was faster to close and could close the deal at the end of 2019 versus going into 2020, which was a motivating factor for JP Morgan,” Foshay says. “But the Singaporeans and the Koreans were actually [bidding] at a higher price.”

Distress isn’t as much of a focus, but Foshay says a subset of overseas investors, including a lot of family office investors, are actively seeking those opportunities. “They’re looking at it both in the equity space and in the debt space,” he says. “And they’re looking at market sectors that are faring OK, like office, multifamily and student housing.”

But Foshay isn’t seeing them pursue the hardest-hit sectors. “We haven’t really seen them venture into the hotel and retail markets yet,” he says. “They’re still seeking further clarity on the state of the market.”