The Dow Jones Industrial Average dropped more than 1,400 points in just the first two weeks of 2016, but that volatility appears to be avoiding the commercial real estate industry, especially when it comes to cross-border investment in the United States, according to JLL’s U.S. Investment Outlook.
“While we’re seeing volatility and uncertainty in parts of the financial markets, the relative strength of economic and leasing fundamentals continues to position the United States as an attractive, healthy and transparent market for cross-border investment,” said Steve Collins, International Director and President of JLL Capital Markets – Americas. “This is reinforced by a compressed global yield environment seeing low, or in some cases, negative yields.”
Cross-border transactions increased more than 150 percent year-over-year in 2015 to a record $71.7 billion, according to JLL. That surpasses the 2007 record by more than $30 billion. Foreign partial interests have averaged 27.4 percent over the last five years, nearly double the pace of similar transactions in 2005-2007.
Foreign Investment Launches Industrial Sector Into Record Fourth Quarter
For the first time in history, the industrial sector usurped office as the number one destination for cross-border transactions, accounting for 36.1 percent ($25.9 billion) of total offshore capital. JLL research shows that Asian investors spurred much of that industrial growth. Singapore-based investors accounted for $12.7 billion in offshore capital alone.
“Foreign investors are seeing an opportunity to make portfolio investments in the industrial sector, especially as spreads between U.S. commercial assets and global ‘risk-free’ rates continue to remain healthy,” said John Huguenard, International Director and leader of JLL Industrial Capital Markets.
However, JLL predicts that as sovereign wealth funds and pension funds continue to pour capital into the U.S. industrial market and syndicate down to minority interests — specifically with portfolio deals — 2016 sales will still be up over 2014, but down from 2015’s record-breaking haul.
Some key takeaways:
- $11.2 billion: The amount sovereign wealth funds invested into the industrial sector in 2015, up more than 2,832 percent year over year.
- $12.7 billion: The amount attributed to Singapore-based investors. Investors from the next three top nations (Norway, Canada and the United Arab Emirates) accounted for roughly the same amount of capital last year.
- 5.0 percent: The yields in gateway and high-growth markets like Chicago and Miami. JLL predicts a decline in vacancies along with longer leases will boost valuations on industrial assets in 2016.
Foreign Investment Boosts Office Market
The office sector saw triple-digit year-over-year investment increases in 2015, up 126 percent. Five countries – Canada, China, South Korea, Germany and Norway – accounted for 81 percent of total foreign investment volume.
While the source remained the same, the destination bucked trends. Investors dug deeper into primary markets and were willing to settle for less than Class A and Trophy assets, which were priced 32 percent higher year over year. As a result, Class B asset acquisitions by foreign buyers increased 7.3 percent over 2014.
Secondary markets benefitted from limited supply in the Central Business Districts and saw foreign investment reach $2.2 billion. This migration to secondary office markets remains selectively focused on high-growth markets and, even more so, specific asset profiles.
To learn more, including information about additional commercial real estate sectors, click here to download JLL’s U.S. Investment Outlook.