U.S. commercial real estate could attract even more
foreign investment thanks to tax changes included in the federal spending bill
that was enacted in December.
The law made changes to the Foreign Investment in Real
Property Tax Act that “are expected to put global companies and pension funds
on a more equal footing with their U.S. counterparts,” according to Anika Khan,
a senior economist at Wells Fargo Securities.
Effective revenue in San Francisco's Rincon/South Beach
office submarket grew 30 percent last year, partly due to foreign investment.
This could increase foreign investment in commercial real
estate in markets and sectors “that are already seeing record-breaking
valuations,” Khan writes.
Foreign direct investment in U.S. commercial real estate
rose to $87.2 billion in the fourth quarter, nearly four times what it was four
years ago, according to Real Capital Analytics. In December, it skyrocketed “to
its highest monthly level on record, which was likely due to foreign investors
already taking advantage” of the tax changes enacted that month, Khan writes.
This surge of foreign capital could be bad news for U.S.
investors, who complain it’s “elevating valuations and crowding them out,” Khan
writes.
“Some investors even suggest a bubble is brewing in major
markets” preferred by foreign investors, she writes.
Over the past four years, the most popular office markets
for foreign investors have been Manhattan, Boston, Washington, D.C., Los
Angeles and Chicago.
Foreign investors also have increased their investment in
industrial properties, particularly in northern New Jersey, California’s Inland
Empire, Chicago, Los Angeles and Seattle.
Three office submarkets favored by foreign investors are
worth watching closely, Khan advises, because their effective revenue — the
product of occupied stock and rent — is much higher than average. Those
submarkets are Rincon/South Beach in San Francisco, Chicago’s City West and
Fort Worth’s Northwest.
Source: Philadelphia
Business Journal
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