Foreign Investors Pile into US Commercial Real-Estate Bubble

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With impeccable timing, after a blistering 7-year price boom.

2016 might later be called the peak year in terms of commercial real estate, or even the post-peak year, depending on the metric. Overall office sales in 2016 fell 7% from 2015, to $140.5 billion, according to JLL research cited by CommercialCafé, a sister company Yardi Matrix. And leasing activity was hampered by office tenants that were “reluctant to make any major moves pending the conclusion of the presidential election.”

But graciously, foreign investors jumped in with both feet to help out. The report by CommercialCafé:

[T]he market has become a haven for offshore investors, who are pumping record amounts of capital into US office assets, especially in primary urban cores. According to JLL research, foreign office investment surpassed $20 billion in 2016, accounting for 16% of the overall acquisition volume.

And while, historically, Canadians have been the most active foreign players on the market, Asian and German investors are now stealing the spotlight.

Of the 50 largest office deals that closed in the US in 2016 – the trophies that get global attention – offshore buyers accounted for 43%! And those from Asia alone accounted for 16%:

  • Mixed foreign and US: 9 deals for $7.1 billion, 19% of total
  • Asian: 8 deals for $6.0 billion, 16% of total
  • European: 5 deals for $2.3 billion, 6% of total
  • Canadian: 1 deal for $914 million, 2% of total

Notable purchases by foreign entities included China Life’s $1.64 billion purchase of 1285 Avenue of the Americas in New York, in a joint venture with RXR Realty (New York); and Hong Kong Monetary Authority’s $1.15 billion acquisition of 1095 Avenue of the Americas.




So how is their market timing?

The Greenstreet Property Price Index in February was flat for the fourth month in a row. You have to go back to the early 2000s to find a flat spot this long. During the Financial Crisis it peaked, and without dilly-dallying around, it plunged, and then, fired up with the Fed’s free money, it soared. But this time, there is no crisis. It just hit the ceiling.

Year-over-year in February, the index rose only 2%, not even keeping up with consumer price inflation, a bitter disappointment after nearly eight years of a blistering boom during which the index soared 107%:

As the chart shows, CRE is highly cyclical. Even the Fed, which rarely worries about asset bubbles and has a passion for inflating them, is officially worried about the CRE bubble and what its implosion might do to the lenders. Its efforts to make monetary policy less accommodative are in part targeting the CRE price bubble. So it is unlikely that the plateau of the past four months will just remain a plateau.

The biggest culprit was the apartment segment. The sub-index fell 3% in February and is down 4% from a year ago. The office sector still rose 2% for the month and 5% year-over-year. Self-storage which had been white hot, having surged nearly 160% since the trough in 2009, declined in February for the first time since that trough, but was still up 8% year-over-year.

The remaining segments – industrial, mall, strip retail, health care, and lodging – were essentially flat year-over year, except malls where the index still eked out a gain of 3%, despite the store-closing and bankruptcy turmoil taking over the brick-and-mortar retail industry.

Commercial real estate loans have not yet seen any such plateau, and leverage has continued to soar, even as valuations have hit the ceiling, and even as transaction volume declined last year. In February, commercial real estate loans at all US commercial banks increased once again, to hit a new all-time record of $1.99 trillion:

So thank you, foreign buyers, for stepping in at these red-hot prices when we need help the most. But foreign buyers were obviously not the only ones still buying.

The largest office building transaction was the $1.93 billion purchase of the AXA Equitable Center at 787 Seventh Avenue in Manhattan, by CalPERS in California, the largest public pension fund in the US. The deal was one of CalPERS’ largest ever investments. It closed in January 2016, before the dark clouds had started to waft over CRE. AXA Financial was the seller.

CalPERS is counting on 7% annual returns every year, for all years to come, and even then it is woefully underfunded. So it’s going out on a thin limb to get those returns, and a glitzy office complex, acquired at peak dollars after seven years of booming prices, is one of its efforts in that direction.

And borrowing money to fund these transactions is going to get more expensive, which makes the equation tougher to solve for potential buyers. This is an issue for commercial as well as for residential real estate. “Many fear the Fed is behind the curve. The market is even further behind: This is clearly a dangerous situation.” Read… Bond “Carnage” hits Mortgage Rates, Aims at Housing Bubble 2




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  30 comments for “Foreign Investors Pile into US Commercial Real-Estate Bubble

  1. Nik
    Mar 14, 2017 at 10:55 pm

    Wait……No Big Commercial Buyers..from Mexico..? lolol Guess No one could come-up with a Gazillion Pesos..?

  2. economicminor
    Mar 14, 2017 at 11:20 pm

    If you can launder your money in another country, why care about the price.. What ever they lose, if they do, will just be the cost of fencing the money..

    When the entire world is a ponzi pyramid, where do you want to have some security? In India, Vietnam, Indonesia, China, Europe, maybe Greece or Turkey? Ukraine? Russia? Denmark? Japan? Korea? The US may be in a BIG bubble but it is certainly a better place to hang out than any of the above.. and to hang out anywhere you do need money stashed.

    Which banks are running the washing machines?

  3. OutLookingIn
    Mar 15, 2017 at 1:11 am

    Excess speculation in the CRE sector by use of leverage, eventually will have to be paid for. This is going to require a large amount of debt to be written off. In particular the private investment equity sector, will suffer the greatest amount of financial pain.
    Liquidity in the credit markets is now almost non-existent. Asset valuations are much too high, the assets supporting the debt are no longer worth the loan balance!
    As global political and financial uncertainties grow, so do higher bond rates as risk premiums increase. Pretending that debts are assets rather than liabilities, has led many to believe this false construct and to lull them into a perception of perceived wealth. An enormous amount of presumed notional wealth is going to vanish.
    The large institutional holders of these Mortgage Backed Securities (MBS), (REITS), etc: which are mainly pension funds, will see an eruption of anger (that will shock and horrify) from the pension fund recipients, as their monthly pension allotment is drastically cut or vanish all together.

    • Larry
      Mar 15, 2017 at 2:28 am

      Out looking in.. Can you back up the comments that “the assets supporting the debt are no longer worth the loan balance!” other then the retail sector the loan us backed by the monthly rent collection, and DSCR ratio of 1.2

      • OutLookingIn
        Mar 15, 2017 at 10:14 am

        As with all information, you must search for it.
        It is there for all to see who will invest their time and effort to find it, analyze, co-relate, cross reference, valuate, question, etc: The road to the poor house is littered with lazy individuals.

        Here is a good place for you to start;
        http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.html

      • Michelle
        Mar 15, 2017 at 10:44 am

        (Can you back up the comments that “the assets supporting the debt are no longer worth the loan balance!” )

        It’s not that difficult to back up considering these transactions are triple, 4x or more construction costs for old buildings.

        Housing is no different.

    • West
      Mar 15, 2017 at 11:37 am

      Ask yourself this: in the last recession/correction, who came out better post 5 years, post 8 years, etc.

      Institutions and individuals made whole 100% via US Taxpayer transfusion, either explicit via handouts, or implicit via Fed policies.

      We are living in the textbook definition world of moral hazard.

      What would make this time seem different?

  4. MC
    Mar 15, 2017 at 2:26 am

    What I found particularly striking is the identity of these big time peak buyers. Just to quote a few:

    CalPERS – A State of California Agency
    Hong Kong Monetary Authority – Government Authority
    China Life Insurance Co – 70% owned by the Chinese government
    Qatar Investment Authority – State-owned holding
    Olayan Group – Typical deeply opaque Saudi fund, meaning you don’t know where private ends and public begins

    Notice the trend? They are all taxpayer-backed, both explicitly (China Life) and implicitly (Olayan). If shady Indian and Russian businessmen are laundering their money, they are doing it through different means.

  5. Bruce Adlam
    Mar 15, 2017 at 2:29 am

    As long as you have no debt or little debt you can wait it out even if you have to wait 10 or 20 years you haven’t lost unless you are forced to sell.

    • Larry
      Mar 15, 2017 at 2:33 am

      Well that’s what we all paper loss, if the value goes down below your purchase price you got a loss, you can choose not to recognize it if you wish….

    • Nicko2
      Mar 15, 2017 at 6:51 am

      Exactly, people are buying properties in the US, Canada ect… as safe haven assets, a place to park cash for contingencies. Renting it out to cover costs is fine, making a profit is irrelevant.

    • The Orca
      Mar 15, 2017 at 8:26 am

      Do I have my math correct? If Calpers needs to earn 7% per annum and just holds the asset for 20 years without cashing anything out, they will need a 262% increase in the value at sale to work things out.

      • Nick
        Mar 15, 2017 at 9:50 am

        That would assume their entire return would come from appreciation. They should realize some positive cash flow as well although I’m sure it was sold at a pretty low cap, perhaps 2-3%.

    • David H.
      Mar 15, 2017 at 9:26 am

      CRE works with leverage until you own a property 10 or 20 years to reduce the debt. That is when it becomes a cash cow and beautiful.

      The real issue is what happens to rent #’s and vacancy until you get to that point.

      If the last time was any indication, that is when it is time to buy and cash is king.

    • Bastian
      Mar 15, 2017 at 11:13 am

      Sell today and limit your losses or sell later and double triple or quadruple your losses?

      Are you serious?

    • Cyrus
      Mar 15, 2017 at 11:50 pm

      Right, you buy a 2 million dollar house, it goes down to 1.2 million, you wait another 20 years for the price to go back to what you originally bought it. Brilliant lane. Of course with the inflation, by then that future 2 million is worth only 1 million in terms of of present dollar.

      It is a good sales pitch for your clients, but here on Wolf Street most folks are money smart; they don’t fall for that kind sales pitch.

  6. Michael
    Mar 15, 2017 at 7:20 am

    Loss will be a motivator for these when the market turns. This explains the glut of construction in Santa Clara. The reversal is going to be breath taking.

  7. Petunia
    Mar 15, 2017 at 9:20 am

    It shouldn’t be a surprise that the big RE investors are coming to a country run by a big RE developer. The US seems to be the only place bucking the trend against foreign investment.

    Meanwhile, in Paris, they are talking about taxing empty residential properties at 60% and even forcing divestiture. This is more in line with what will be happening worldwide. It should be happening here.

    • Smingles
      Mar 15, 2017 at 11:29 am

      “Meanwhile, in Paris, they are talking about taxing empty residential properties at 60% and even forcing divestiture. This is more in line with what will be happening worldwide. It should be happening here.”

      Agreed. Good luck ever seeing that. R and D elites aren’t going to ever go for something like that, because they are the ones who actually own multiple properties, whereas most middle and lower class don’t. So it would benefit the bottom 80% to the detriment of the top 20%. When have they ever gone for something like that?

      Plus, R’s would be opposed to it on a philosophic basis anyways. Taxes are evil, you see.

      • Petunia
        Mar 15, 2017 at 12:16 pm

        It is shortsighted of you to only see what the R’s aren’t doing or won’t do. Affordable housing is the typical domain of liberals and they are nowhere to be seen in supporting the working class on any economic issue causing them distress.

        Personally, as an R, I would like to see mega landlords subjected to rent control of some kind. Good luck waiting for any D to propose it.

        • GH
          Mar 15, 2017 at 1:14 pm

          The D House Speaker in Oregon recently proposed rent control legislation. We’ll see what happens.

        • TJ Martin
          Mar 15, 2017 at 1:39 pm

          Excuse me Petunia but if one were to research the history of rent control in NYC as well as the state of New York one would see that twas the Democrats that instated it , defended it [ against constant RNC opposition ] and maintained it thru out the decades despite constant pressure from the RNC to eliminate it in favor of a Free Market rent situation : with… the overwhelming majority of those Rent Controlled apartments and Condo’s being well within a Working Class budget . Fact is many of those NYC ( and greater area ) Rent Controlled units rents are below poverty level

          Suffice it to say as a bonafide I .. as in Independent .. I’d love to see those of you voting hard right to drop this Victim * schtick in desperate need of a Scapegoat and come to grips with the fact that as much as the D’s you despise may of made mistakes recently those R’s you adore live by the mantra /motto ” Let them eat cake ” In other words the R’s you venerate so highly couldn’t give a rats petunia [no insult intended ] about you , me or for that matter their own families . All they care about in their ‘ swamp ‘ of Ayn Rand(ian) ideology/theology [ having made Rand their new ‘ goddess ‘ ] … is themselves and their own back pockets

          * Reading suggestion ; ” Culture of Complaint ” by Robert Hughes

        • TJ Martin
          Mar 15, 2017 at 1:47 pm

          FYI ; In addition to my previous response Petunia . Back in the 1970’s when I was ‘ working ‘ in NYC I was the beneficiary of a Rent Controlled unit . First – it was a mighty fine and well maintained apartment . And secondly had it not been for that rent controlled apartment I would of never been able to launch my career in NYC and probably would of never reached the level of success that I have . e.g. Rent control did what it was supposed to . Allowing a ‘ working class ‘ kid to attain heights otherwise unimaginable

  8. TJ Martin
    Mar 15, 2017 at 9:23 am

    Ahhh the logic of illogic . Here in Denver you see vacancy signs across the full gamut of commercial properties from light manufacturing to retail to office : from Denver Tech to Downtown Denver yet the skies are full of cranes for as far as the eye can see wherever there’s a plot of land to be filled . And yet we’re all supposed to believe this isn’t a bubble about to burst in everyone’s face ?

    Truly.. from the oval office on down the lunatics have taken over the asylum .

    • DH
      Mar 15, 2017 at 4:12 pm

      I see the same here in Portland.

      It’s been frustrating, as we moved here from L.A. to save up for a few years and then buy a home, but the prices of the houses we were originally looking at have gone up $200K in only a few years. Summer 2017 was our original goal to start officially looking, because our son will be starting school and has a few special needs to deal with, so we want certain districts. Now we’re balancing our belief of a housing bubble with the practicality of getting in and being done with it. We can technically afford to buy now, but reading about this stuff every day since the last recession certainly makes me trigger shy. Gulp.

  9. T vogel
    Mar 15, 2017 at 12:43 pm

    Here in my small town 1 hr north of SF brand new retail is being built right next door to empty brand new retail. Household rent costs are eating everyone’s discretionary cash wish these people were building multifamily instead.

    • Lola
      Mar 15, 2017 at 12:59 pm

      Given the record levels of new multifamily and record levels of defaulted housing inventory in the Bay area, why build more?

  10. unit472
    Mar 15, 2017 at 4:30 pm

    Its not irrational to want to own existing real estate. I note that Calpers during the housing bust had invested in raw land ( Lehman had a big chunk of desert property too). The losses on land can be near total and there is negative cash flow owning it. For a big pension fund that has to invest in something, prestige office space is probably as safe as anything other than US Treasuries and what kind of return do they offer.

  11. Petunia
    Mar 15, 2017 at 6:04 pm

    TJ Martin,

    Rent control in NYC was a remnant of price controls from WWII that were kept in place after the war. I grew up in one of those apts. Rent stabilization was the program that allowed housing built later as affordable to remain affordable.

    As for your assumption that the D’s care more than the R’s about us, it is obvious you are not paying attention.
    All of this unaffordability grew under our last D president.

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