Starving foreign capital in the COVID-19 era – Business Observer

International investors are trying to test the waters for commercial real estate in the United States and are aggressively bidding on some deals after this unprecedented pandemic has sent many people underground for months at home and abroad.

The only problem is that the market has yet to decide to fully accept their inclusion, given the obstacles that still exist for them in a world hit by COVID-19. (Although, ironically, some of their home countries have already largely beaten the virus compared to the United States)

Janice Stanton, executive managing director of Cushman & Wakefield, which manages the entire lineup advising various international investors from Asia to the Middle East and Europe, said institutional players have developed a renewed sense of urgency to pick up on American markets.

How I characterize it is seeing green shoots of activity, said Stanton, hinting at recovery-like activity. She pointed to the current landscape of low interest rates and currency hedging costs against the US dollar and lower asset valuations as the main reasons these investors have launched a campaign to start underwriting and bidding on. aggressively but selectively.

People still say, OK, I can still get commercial real estate in the US at a cap rate of 4 to 5, I’ll do it. This relative value gap still looks attractive. But investors around the world are mostly on the sidelines. If you have to invest capital, you think the United States is still [very] attractive, said Melissa Reagen, head of research for the Americas for global investor Nuveen Real Estate.

Institutional players have always been linked to basic office products in gateway markets, and this is one area they have remained in, despite the uncertain outlook for the industry.

Stanton said that for basic office products, some investors who were under-allocated in their portfolios say this may be our opportunity to invest where it was difficult before, although there is still difficulties there, she said. Basically, Korean investors like to see tenants on credit and longer average lease terms, because no one knows what the recovery will look like; [theyre thinking], if we can get something buttoned up for the next couple of years, we have time to find out.

She also added that others are looking for direct distress so we’ve seen bottom fishing. There is a bit of a bid ask spread out there, as the market is not at that point.

When capital thinks of safety, there is a flight to quality, so they focus on the US as one of the markets they want to invest in, said Tom Traynor, group vice president of CBREs debt and structured finance. The focus is on commodities, not so much value-added or core-plus, in transit markets familiar with institutional sponsorship.

Apart from that, during the first half of this year, investors pivoted to focus more on multi-family and industrial properties in a bid to seek more COVID-19 insulation in assets where many of these investors do not. ‘have never really maintained a meaningful brand. . Stanton said they had also moved to data centers, life sciences and medical offices.

Traynor said the type of property is an important factor. [looking at] multi-family, industrial and logistics, data centers, life sciences and biotechnology, and office more selectively, he said. Single tenant business is also important with a lot of overseas guys, especially if you have an ecommerce business like Amazon or a tech company like Apple or Microsoft. These become easy sales for those guys, who are willing to put the money to work at attractive cap rates because they feel protected.

And outside of typical metrics and drivers such as job and population growth, sources who spoke with CO said more granular data can be used to get a better picture of the business. in a COVID-19 world. Regularly updated, real-time physical occupancy data tracked by large companies with property management services such as Stantons C&W credit card usage, open table reservations and foot traffic data enables better understand how residents of some of the United States’ most attractive primary and secondary markets respond.

Yet, in order not to develop a histrionic narrative, the general activity of foreign investors has of course plummeted this year, after a year of decline in 2019 which followed a record year for them in 2018, when they were involved in about 88 billion dollars. in a new-deal activity carried out by groups outside China.

Masses of foreign and domestic liquidity (to the tune of around $ 200 billion for North American-focused equity vehicles, according to Newmark Knight Frank’s second-quarter U.S. financial markets report) are being left behind. side. Many opportunities have arisen from the ashes of this crisis, but can they win them?

An advisory source who spoke anonymously to Commercial Observer to avoid conflict said they recently saw two outright acquisition opportunities where international investors made the highest bids, one on a multi-family property class A and the other on a top notch trophy desk in a gateway market, but lost. on awarding the investment because the seller didn’t like the terms and didn’t want to face additional hurdles that would come with this type of investor in today’s environment.

After all, COVID-19 has changed the way we do business.

Were in a world where, if you’re in a foreign market, you might not be able to travel or get on a plane and come to the United States and look at a new market, Traynor said.

Travel issues, as well as the extra time it would take to get a deal through an investment committee, sometimes a month, really stand out in today’s market, even though these foreign investors have high bids.

[Theres] money from outside wants committee meetings per month [out], which works against them in a market that operates under accelerated deadlines in some cases, said Stanton. It is a combination of prices and conditions. Even though the price is right, but conditions look like they could collapse in two weeks, [bids] will not be accepted.

These obstacles have become real competitive engines that can make or break a winning bid, Stanton said. Travel issues created a “ do-or-die ” attitude for some, who came out to show an added sense of motivation and determination. Stanton pointed to a case where a South Korean institution sent one of its members for a month-long campaign in the United States, which consisted of two weeks in quarantine and two weeks away, carrying out the necessary inspections of ‘an asset, in order to gain a deal. .

Koreans generally unionize, she said. For people without a platform here, it’s been more difficult, and some Korean regulatory guidelines say you have to inspect, so they have to get on a plane; it’s a quarantine month. You [have to] really want a deal. This sets the bar.

She added that those with offices in the United States are less affected and have a bit of a head start, saying she spoke to a German investor who said if [they] can put someone in a car and drive [within] 12 hours was good. Some, of course, have joint venture partners they can delegate or rely on to handle property inspections and other obstacles in the United States. Some have made that concession, Stanton said.

Nonetheless, interest in investing can be easily swayed by economic and geopolitical factors, uncertainty and volatility have become commonplace in the United States, and the tap could easily be turned off, sending foreign capital to the periphery.

It’s true everywhere, but if something makes people nervous, they’ll turn off the tap, Stanton said. They [might] say, the investment committee does not meet this month, due to too much volatility. This gives them the opportunity to request a break. The United States is certainly attractive, but people are cautiously optimistic.

On the smaller end of the spectrum, for investment managers representing high net worth individuals, family offices and smaller institutions in Asia Pacific or the Middle East, appetites are just as insatiable, albeit a bit insatiable. more unique, such as student accommodation.

In recent weeks, private equity real estate firm EastAlliance Partners, which has offices in New York and Shanghai, has responded to a number of phone calls from investors in Asia Pacific, particularly institutions. small and medium-sized South Korean women seeking opportunities in US commercial real estate. goods.

Company CEO Andy Zhong humbly said his one-year-old company, which raises funds from high net worth individuals, family offices and small institutions in Asia, is unlikely to answer those phone calls after he been in business for only one year, most of which was during an unprecedented pandemic.

Zhong said it was a sign of the readiness of even smaller foreign investors to deploy capital in U.S. commercial real estate, which despite COVID-19 and the economic uncertainty it creates, remains a game of very strong value, adding that many of these investors are mostly driven by returns. They can take more risk for returns, he said.

Noam Franklin, Managing Director of Berkadias JV Equity and Structured Finance Group, said his team is attracting more interest from foreign family offices in cash flow-focused Class A multifamily in US secondary markets. , after COVID-19.

Until COVID hit, large family offices in family offices were actually only looking at desks, Franklin said. They say: Just show us the office. There will now be a pullback in the office market, a pause in office investment in major markets until [many] understand how it goes. He referred to markets like Denver, Seattle, Porland, Austin, Tampa and Clearwater, Florida, as well as Salt Lake City, where Chinese capital has developed as growing hot spots for these investors.

Nonetheless, there are a number of unknown factors that could change sentiment in the coming months, including a second wave of COVID-19 and more specifically, the November presidential election, which some sources said foreign investors already thought it was already acquired. two months ago.

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