As 2024 nears its end, Tal Peri is looking forward to the start of the New Year. The Head of US East Coast & Latin America at Union Investment Real Estate anticipates that the fund will be making more investments in US commercial real estate in 2025 after a period of relative quiet. "We will be refocusing on acquisitions between the first and second quarter of next year," Peri tells GlobeSt.com.
Peri is not alone. His plans appear to be a harbinger of a broader trend in which foreign investors, after years of cautious engagement, are gearing up to make a significant comeback in the US CRE. This resurgence comes on the heels of a challenging period that saw foreign investment dip to historic lows. "Typically, about 10 to 15% of total acquisitions come from foreign investors, but lately we've seen shares as low as 5%," explains Gunnar Branson, CEO of AFIRE, an association for international real estate investors. "It has not been a good year,” he told GlobeSt.com.
But the tides are turning, and 2025 is shaping up to be a different experience for foreign investment in US CRE. The reasons for this optimism are multifaceted, ranging from macroeconomic shifts to evolving investment strategies.
Economic Tailwinds Fueling Investor Confidence
At the heart of this renewed interest lies a shifting economic landscape. "We have seen the rate decrease, and the expectation is that more will follow," Peri notes, referring to the recent interest rate cuts by the Federal Reserve. This monetary easing is music to the ears of foreign investors, who have long grappled with the challenges posed by a strong US dollar.
The impact of these rate cuts extends beyond the cost of capital. As Peri explains, "As rates come down so will the US dollar. That should continue to boost our net performance and allow us to be more price competitive."
At the same time, the robustness of the US economy continues to be a major draw for international investors. "The US is one of the widest and deepest markets for institutional investment,” Branson said. We have 6 to 12 global cities compared to one global city in other countries. That is a good diversifier for portfolios."
Shifting Investment Strategies: Quality and Diversification
As foreign investors prepare to re-enter the US market, their strategies are evolving. The focus is increasingly on quality assets in diverse locations. "We are focused on a flight to quality," Peri states. "We are looking at new buildings with tenants that have good credit and longer lease terms."
This flight to quality doesn't mean investors are limiting themselves to traditional gateway cities. Andrew Charles, Partner in the Real Estate Division of Kramer Levin, observes a significant shift in investor behavior. "Foreign investors are increasingly willing to go outside of the main gateway markets of New York, Boston, Washington DC, and San Francisco," he told GlobeSt.com. "Now we see deals in Denver, Phoenix, San Diego, and Nashville."
The multifamily sector is emerging as a particular favorite among foreign investors. Peri's firm, for instance, is making a concerted push into this asset class. "Going forward our main focus will be multifamily," he declares. "We are looking for mid-to-high rise buildings mostly in the CBD, but strong mixed-use buildings in the suburbs are also possible."
In December 2021, the fund acquired an apartment in Fort Lauderdale, and it has seen a 25% rent growth over the hold period of two years, Peri said. “It was the fifth largest multifamily deal in South Florida."
Navigating Challenges in a Complex Landscape
Despite the optimism, foreign investors are not naive to the challenges that lie ahead. Climate-related risks have emerged as a significant concern, particularly in certain regions of the US. "The majority of investors we have surveyed believe there will continue to be a significant increase in insurance rates in the Southeast and Gulf Coast," Branson said.
This heightened awareness of climate risk is causing some investors to reassess their geographical preferences.
Political and regulatory uncertainties also loom large in the minds of foreign investors. "There is a general consensus that the new administration and Congress may hinder cross-border capital flows because of the expected tariff policies and potential trade wars," Branson said. However, he adds, "But investors will not be deterred from investing in the US."
Charles echoes this sentiment, emphasizing the enduring appeal of the US market: "They have more opportunity here and the potential for larger returns than they do investing anywhere else."
Looking Ahead: A Year of Opportunity
As 2025 approaches, there's a palpable sense of anticipation among foreign investors and market observers alike. "I believe 2025 is the year we turn the corner," Branson predicts. "There is a lot of interest in investing in debt and a lot of interest in finding distressed assets."
This optimism is grounded in a belief that the market may be nearing its bottom. "A lot of people believe we are near or at the bottom," Branson notes.
For Peri and his team at Union Investment Real Estate, this means ramping up their acquisition strategy. "We don't have a specific investment amount in mind, but our deal volumes range from $100 million to $300 million per deal," he said.
Charles sums up the prevailing sentiment among foreign investors: "There is every indication that these markets will continue to experience growth." This growth potential, coupled with the relative stability of the US market, makes for a compelling investment proposition.