Despite fears of trade wars and increased protectionism, foreign investment in the United States remains robust. In fact, the U.S. continues to be the single largest recipient of foreign direct investment (FDI) in the world: more than $450 billion was pumped into the U.S. economy from other countries in 2016, according to the Bureau of Economic Analysis at the Department of Commerce.

A significant amount of this capital is flowing to commercial real estate (CRE), which continues to be the sector of choice for many foreign investors. International investors have purchased more than $365 billion in U.S. CRE since 2010, with the majority of capital flowing to the largest metropolitan regions. Manhattan alone represented nearly a fifth of all foreign investment in U.S. CRE in 2017, greater than the next three markets combined.

These inflows to the sector may only be the beginning. A growing U.S. economy should continue to drive more demand for commercial property.

Why is there so much interest in U.S. commercial real estate?

Real estate has long played an integral role in global investors’ portfolios, but recently U.S. CRE has separated itself from other subsectors within the class. From a top-down perspective, the U.S. market, which has largely recovered from the financial crisis and is fueled by strong job creation and business expansion, is viewed as stable. The market compares favorably to regions such as Europe, where the economic turmoil caused by Brexit has turned off many would-be investors.

From a micro perspective, U.S. CRE offers the potential for higher returns relative to the modest prime capitalization rates in London and parts of Asia. At the same time, the U.S. market is renowned for its scale and liquidity, providing foreign investors the flexibility to exit their investments if they decide to invest their capital elsewhere.

Where are the best investment opportunities in CRE?

Much of the focus in the CRE industry from an FDI perspective is on big-ticket transactions in major cities. However, the best investment opportunities may actually be in suburban markets or in second-tier cities where there is more room for growth. For example, instead of focusing on the Los Angeles market, foreign investors may be better served looking at the nearby Long Beach area, which offers many of the same benefits as LA yet is more competitively priced. These tier II communities offer CRE opportunities beyond the traditional skyscrapers, which may be too large of an investment for some foreign buyers. These smaller markets are ripe with assets like four-story office buildings that offer an attractive risk-return profile in today’s low yield environment.

As should any investor, foreign buyers should conduct thorough due diligence prior to pursuing a deal. The U.S. CRE market is highly segmented with varied risk-return profiles for different types of commercial properties in different cities. A retail building in Topeka, Kansas, comes with a set of risk characteristics that differs greatly from a retail building in Brooklyn, New York. Foreign investors without the resources to thoroughly evaluate these properties should work through a broker or financial advisor who has boots on the ground and understands the local markets.

From an asset class perspective, international investors should also think about whether to invest in CRE debt or CRE equity. Given that U.S. real estate prices have mostly returned to pre-crisis levels, there is growing concern that the current real estate cycle may be near a peak. Within this environment, CRE debt may provide a safer investment option for foreign investors because they would be better protected in the event that prices fall.

Where should we expect foreign investment to come from in the future?

According to an analysis of foreign investment in CRE in 2016 by the National Association of Realtors (NAR), 47% of realtors queried said they experienced an increase in their number of international clients over the past five years, and 40% said they expected international buying activity to increase in 2017.

Most FDI in the U.S. in 2016 (the most recent year for which data is available) came from the world’s largest economies, including the U.K. ($598.3 billion), Canada ($453.6 billion), Japan ($424.3 billion) and Germany ($372.8 billion). Further down the list of foreign investors was China, with $58.2 billion invested. But when it comes to CRE, China is the clear leader, representing 17% of all foreign CRE buyers in 2016, more than neighbors Mexico (14%) and Canada (7%), as well as the UK (7%). We can expect that China and other developed countries will continue to drive this trend as they seek to invest in burgeoning U.S. metropolitan markets that offer less volatility and attractive risk-reward profiles compared to their domestic markets.

Indeed, many of the biggest CRE deals ever involve China, including the $2.21 billion purchase of 245 Park Avenue by HNA Group in 2017 and the $1.95 billion acquisition of the Waldorf Astoria hotel by Anbang Insurance Group in 2014. These types of deals are indicative of a larger trend of foreign investors entering the U.S. market via the CRE sector, with Chinese investors among those able to write the largest checks.

South Korean institutional investors are also active buyers of U.S. CRE, particularly real estate debt. According to data from Preqin, South Korea (subscription required) represented 21% of all foreign investment in U.S. real estate debt as of mid-April, significantly more than China (12%) and Australia (11%).

All this foreign money invested in U.S. CRE is ultimately a boon to the U.S. economy. While individual consumers and businesses may fret about raised rents and higher prices, the overall health and diversity of the U.S. CRE market means that there will be plenty of capital to go around.

-Originally posted by Forbes.

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