by Dan Rafter
Look at the biggest commercial real estate deals across the country. The odds are high that investors from overseas purchased these key office towers, retail centers or apartment projects. And the importance of foreign capital to the U.S. commercial real estate market is only increasing.
Midwest Real Estate News recently spoke with Greg Warsek, senior vice president and senior regional manager with the Chicago office of Associated Bank, about how important foreign dollars have become to the health of the local real estate market.
Midwest Real Estate News: It’s little secret that foreign investors are sinking a lot of money into commercial real estate assets across the United States. But where are those dollars flowing?
Greg Warsek: The coasts are still the predominant recipient of foreign capital. Our investors, though, are starting to move into the central part of the United States to look for better values than what they are seeing in the coastal markets, which are completely overheated right now. Some of the cap rates we are seeing properties trade at on the coasts, at least from our viewpoint, seem irrational and crazy.
MREN: Is this trend, then, starting to creep into the Midwest?
Warsek: A lot of investors do need to look at different markets. They are searching for more reasonable cap rates. Every time an asset goes on the market, at least the assets that we are financing, you’ll see 90 percent of the time a foreign buyer or an out-of-state buyer of that property.
MREN: In what Midwest markets are you seeing the biggest influx of foreign capital?
Warsek: It’s really driving a lot of activity in Chicago, specifically. We’ve also seen a pick-up in Chicago from out-of-state loan requests. We are getting a lot of people in New York City or Los Angeles who are looking for loans to acquire Chicago-based assets.
MREN: What is attractive about Chicago to these foreign and out-of-state investors?
Warsek: A lot of it is the familiarity. Even foreign buyers are familiar with the city. We have a client who that is a big investor from China. The person who runs that group has said that from where they are sitting in China, they know San Francisco, Los Angeles, New York City and Boston. Besides those markets, they don’t know many inland cities in the United States except for maybe Chicago. If you look outside of Chicago in the Midwest, it’s a bit of a step down in terms of familiarity. For foreign investors, it takes some education for them to understand the Midwest markets outside of Chicago. I’ve talked to my peers throughout the Midwest. I’m not hearing from them that they are seeing the same impact of foreign investors or coastal buyers as we are in Chicago.
MREN: What kind of assets are foreign or coastal investors looking for?
Warsek: If I had to point to one asset class that sees the most activity, it is office. That is strong. But we have seen apartments and student housing attract significant foreign investment dollars, too. I think what’s more important than the asset class is the quality of the asset. Foreign investors are looking for Class-A properties. They want high-quality assets located in strong markets.
MREN: Is the amount of foreign capital being invested in U.S. commercial real estate surprising to you?
MREN: If you really sit down and think about it, it shouldn’t be a big surprise to anyone. Every single week, when you see a big property sale – whether it be retail, apartment, office or industrial – at least 90 percent of the time it feels like an out-of-state buyer, whether coastal or foreign, is a serious candidate to buy that property. The foreign buyers are having a big impact on this market.
MREN: Why is commercial real estate so attractive to these foreign investors?
Warsek: I am on the board for Marquette University. I just had lunch with the person who runs the real estate program there. We were talking about this very topic. A lot of it centers around the perceived stability of the United States versus where this money might be coming from. If you have $50 million in cash, you can buy real estate that gets you a 4 percent to 5 percent return. It is safe and stable. In a lot of countries, there interest rate is negative or zero. It is all relative. So, do you buy real estate in the United States? I don’t want to call it a no-brainer, but it becomes pretty obvious very quickly that commercial real estate in the United States is a good investment.
MREN: Will we see the amount of foreign capital in commercial real estate continue to increase?
Warsek: It’s hard to predict the future. But there are a lot of economists who feel that this is the new normal in terms of low interest rates, at least in the foreseeable future. If that is the case, I see the trend continuing in terms of global investment in commercial real estate in the United States. And it might at some point push into the tertiary markets. I hate to call those other markets tertiary because they are good markets. Investors from other countries might have to start looking harder at markets like, say, Nashville.