The Benefits of Investing in American Commercial Real Estate
November 25th, 2013 by Diane Moore
The American commercial property market has become the desired piece of pie not only for American, but foreign investors. Investors from Singapore, South Korea, Israel, China and many other nations are accelerating purchases in the US real estate as rebounding prices along with an improvement in the economy are luring yield-hungry purchases from foreign shores.
Overseas investors made approximately $ 7.97 billion in purchases related to US commercial property so far in 2013. This is an increase of 25% compared to the same period in 2012, as mentioned by Real Capital Analytics Inc.
With excellent deals, which include the tallest properties in Minneapolis and Los Angeles, cross border purchasers are contributing to the recovery of US real estate, which has witnessed the prices touching new heights. As a result, sellers are deriving the advantage of the increasing demand and values. According to the second-biggest office landlord in the US, BlackStone Group LP, it anticipates a lot of keenness from sovereign-wealth funds for buildings it wants to sell commencing this year.
There is a lot to expect from US commercial real estate in the coming days as Sonny Kalsi, co-founder of GreenOak Real Estate LP from New York, states that this is just the tip of the iceberg.
Foreign investors made approximately 8.8% of transactions related to US commercial real estate from January to April 2013, which was an increase of 8.1% compared to the last ten years, according to Real Capital from New York. The figure measures direct purchases of properties and not investments in securities or funds.
Why is the world chasing after the US commercial properties?
According to a report by Jones Lang Salle, global commercial real estate investments touched $ 100 billion in the first quarter of 2013, which was the highest in five years. The report also stated that New York, Los Angeles, Atlanta, Washington and Houston ranked among the top ten cities in the world for buying commercial properties.
Here are some reasons on why investors are keen on buying US commercial properties:
Government loan program
Small business owners are increasingly getting assistance from the government loan program to purchase commercial properties in the country. This program, which was launched in 1959, has gained a lot of popularity following the end of the recession phase, with the majority of private lenders cautious about providing real estate loans.
Under this program, the amount of business loans shot up by 16% per annum in the first three years after the end of the recession and stood at $ 4.45 billion, as stated by the Small Business Administration.
According to government rules, businesses with fewer than 500 workers and an income of less than $ 5 million are eligible for government-backed loans. These loans normally have a life of 20 years compared to the majority of fixed-rate home loans, which are for 30 years. The interest rates attached to these loans are little lower than the market rates.
It’s a buyer’s market now
The is a great time to be a buyer in US commercial real estate as prices have hit rock-bottom, a decline of 30% from the peak in the nation. In addition, interest rates are at historic lows for those wanting to seek loans.
Small businesses, however, stop
Small businesses, however, stop short at the 25% mandatory up front for a usual loan, particularly at a time when they have toiled to save some cash after withstanding a brutal recession. George Smith, an eminent member of Bank Of America, states that small businesses see cash as a security blanket, and they would be too fearful of putting down a big check.
Loans backed by the government are absolutely enticing. Business owners just have to make a down payment of 10% compared to the 25% or even 40% that’s required in a commercial real estate loan.
Banks find this kind of loan less risky since they put down 50% of the loan amount while the government bears the remaining amount of 40%.
Jeanne Hulit, associate administrator at Small Business Association, says that his department’s job is to keep cash flowing during tough times.
The prices of commercial properties in the US have become highly attractive, according to Walter Page, director of research at PPR. He says that the opportunity now is “abnormal” and adds that this is the perfect time for making a purchase or renovation work.
The loans contributed to only 10% of the total $ 50 billion worth of commercial real estate sold in 2011. However, it’s playing a major role to stabilize prices that shot up by 14% in 2011.
The economy of the country is improving at a rapid pace; the support for this view comes from data related to consumer spending, which surged at a surprisingly rapid pace- pushed upward by a strong demand for building materials and cars.
Foreign investors in the US commercial real estate
The role of overseas investors in the real estate market in the US flows and ebbs with a host of determinants. At present, two factors-the slump in prices of commercial real estate and the suppression on available capital for both financing as well as refinancing-co-ordinate to make this the right time for foreign investors to acquire commercial real estate property in the US.
Foreign buyers looking to the US are expert investors who have made investments in a host of countries across the globe. These smart investors are of the opinion that they can derive advantage of the difficulties faced by the US commercial real estate sector currently. The US offers them the best global environment for capital appreciation and also being the safest country for investment opportunities. They can be effective and aggressive negotiators besides wielding their foreignness as a sword and even a shield while carrying out negotiations. They are expert in making a deal but can walk away in case the deal turns out to be unfavorable.
The market dynamics of the US provide any investor with a capital or admittance to ready capital a chance to make investments in lucrative properties at a highly reduced cost. Elena can be the perfect spot for foreign investors as it has a wide range of properties that suit the requirements of any savvy investor.
It’s expected that many overseas investors will continue to take advantage of the depressed real estate market in the US for a couple of years.
What kinds of properties are foreign investors attracted to?
According to European and Israeli investors, foreign buyers are interested in a wide variety of commercial properties. These include office properties in important markets, retail, which includes both grocery-attached neighborhood retail and major mall properties, and residential/multifamily in regions with planned long-term favorable demographics.
Irrespective of the kind of property, foreign purchasers are keen to take advantage of the falling US prices and also the dearth of financing to drive great deals in the next few years.
These buyers are also interested in off-market properties or opportunities, which are being silently marketed, instead of the competitive bids in the open market.
Some interesting facts of US commercial real estate
Steadily growing demand
Invesco Real Estate from Dallas, which managed roughly $ 52 billion worth of assets as of 31st March, 2013, states that the company has witnessed a steady growth in demand from investors outside the US. This interest is seen from all parts of Europe, Asia and the Middle East. Some relatively young and large sovereign-wealth funds have started showing a keen interest in US commercial real estate.
These investors are drawn to high-quality assets with better returns compared to government bonds. Real Capital states that the average capitalization rate for all kinds of commercial property in the first quarter of 2013 was 6.78%.
The demand for high-quality properties helped in the improvement of commercial real estate prices in April above the record of August 2007, according to Green Street Advisors Inc, a research company from California that measures values on the basis of property appraisals. Another measure, the Moody’s Real Capital Analytics Commercial Property Price Index recovered 51% of its losses as of March, according to the latest data.
Foreign buyers are normally drawn to high-quality properties located in important US cities like the GM Building. A property in Manhattan received a bid from an international buyer, according to an individual closely associated to the sales process. The property, which is under contract, will be sold for $ 1.3 billion to Crown Acquisitions from New York and Highgate Holdings Inc from Texas.
Dan Fasulo, managing director of Real Capital, states that the large trophy deals push up the real foreign investment volume.
Israel –based Harel Insurance Investments and Financial Services Ltd, the second-largest insurer in the country, recently made an investment along with other investors in April to acquire the tallest tower in Minneapolis, the 57-storeyed IDS Center for $ 253 million.
Terry Kennon, managing director of Beacon Investment Properties LLC, which purchased the IDS Center with a group of investors, says that the property was an iconic one and doesn’t come up very often.
Singapore-based Overseas Union Enterprises Ltd agreed to purchase Los Angeles-based US Bank Tower for $ 367.5 million in March this year.
Canada heads the list when it comes to the biggest foreign buyer of US commercial properties since 2010. Singapore took up the second place this year from its earlier rank of No. 7 last year, according to Real Capital. The total purchases by Singapore investors for the first four months of 2013 touched $ 1.9 billion-twice the figures for 2011, which was $ 957 million.
In 2012, Government of Singapore Investment Corporation invested in an office tower (101 California St) in the financial district of San Francisco. It also bought the Grand Wailea in Mau this March along with four other resorts, which included Paulson & Co for an astonishing $ 1.5 billion.
The sovereign-wealth fund had around 10% of its assets in global real estate in 2012 and one third of net assets in various kinds of US investments.
The third biggest foreign buyer in 2013 is South Korea-up from the sixth rank in 2012. The total deals for the first four months of 2013 stood at $ 1.59 billion-an improvement from the $ 1 billion mark of 2012, as shown by data from Real Capital.
In the beginning of 2013, Seoul-based Mirae Asset Global Investments-manager of $ 58 billion-bought an office building of 31 storeys in West Loop district of Chicago for $ 218 million. This was the country’s maiden purchase in the US.
Jaime Fink, managing director of HFF Inc, an important representative of the seller of the IDS Center, says that Australians were the top foreign investors in 2006 and 2007, and adds that Canada has replaced Australia now. According to Fink, South Korea has become more active than Japan now.
The US has turned out to be an investment target because the country has 25% of the globe’s institutional-quality commercial real estate, says Ivanhoe Cambridge from Montreal.
The US is still considered the safest economy in the world. With the economic crisis in Middle East and North Africa (MENA), and other parts across the globe, investors are turning to the US for a safe and sound investment. There has never been a better opportunity to buy commercial real estate in the US then right now. And with Elenavlasyuk right around the corner, investors can remain assured of making the best choice.
Latest posts by Diane Moore (see all)
- Tips for Making your Commercial Property more Energy-Efficient - January 22, 2014
- Remodeling Investments that Will Pay You Back - January 21, 2014
- 21 Reasons to Invest in the US Commercial Property Market - January 20, 2014