When the U.S. residential real estate market hit the skids in the latter part of 2007, it started a chain reaction that would eventually bring the international economy to its knees. Since that time, government officials, economists, and financial experts have been coming up with creative ideas to prop the real estate market back up. These solutions, such as the first-time homebuyer tax credit, have met with mixed success. But in the past year, the U.S. real estate market has been on the rebound, largely because of a sharp increase in foreign investment in U.S. commercial properties.
After bottoming out in 2009, foreign investment in U.S. commercial real estate more than doubled from $5.6 billion to over $13.3 billion in 2010, and the upward trend has continued. By 2011, foreign investment as a percentage of total investment in U.S. commercial properties hit 12.3%, up from 8.4% in the summer of 2010. The driving force behind foreign interest in U.S. commercial properties is the sterling reputation of U.S. commercial real estate held by international investors. Although the U.S. real estate market stumbled for a few years, American properties are still considered a profitable investment over the long haul, and foreigners are looking for better returns than Treasuries and other “safe” holdings.
The plurality of foreign investors is Canadian, with over one-third of foreign capital flowing from the north. After Canada, Mexico and China serve as the next greatest sources of foreign investment in commercial properties. Most experts believe that the surge in Canadian investments in the U.S. commercial real estate market has been driven by Canada’s maintenance of a relatively strong and stable economy throughout the recession.
Can foreign investment create domestic prosperity?
Understandably, many market watchers have wondered what impact the rise in foreign investment in U.S. commercial real estate will have on the American consumer and economy. In general, most analysts agree that an increased flow of foreign capital into the U.S. commercial real estate market will have a positive impact on the broader real estate market as well, which will cause ripple effects to the larger economy. With more commercial property being purchased, inventories will fall, causing prices to rise. While this may prove somewhat frustrating to American real estate investors looking to get some skin in the game, it will serve as a boon to the commercial property market as a whole. It may also spark demand for new construction, which would be to the benefit of the U.S. job market.
In terms of what the future holds, most analysts expect the U.S. to remain attractive to foreign real estate investors, especially in high-rent markets like New York, San Francisco, Washington, D.C., and Boston. Eventually, as the real estate prices begin to rise, foreign purchases of U.S. commercial properties may begin to taper off as investors move to on to rapidly growing cities in the developing world, such as Sao Paul, Mexico City, and Beijing. However, most industry experts don’t expect this to happen soon; the U.S. is still viewed as being one of the most reliably profitable havens for real estate investment worldwide and will continue to be so for the foreseeable future.
While the U.S. real estate market sputters back to health, the American commercial real estate market has established itself as a beacon of strength, thanks in large part to foreign investment. Most view this upward trend in purchases of commercial properties from overseas investors as a step towards full recovery for the U.S. overall U.S. real estate market, and, by extension, the U.S. larger American economy. So while many feared that foreign investors might begin pulling their money out of the U.S., the revived and robust interest in commercial properties has allayed those concerns, indicating that confidence in the financial stature of the U.S. remains strong. Only time will tell, but it appears that we may be knocking at the door of a full economic recovery.
This article is a guest post from NerdWallet.com, a financial decision-making website that puts quantitative, unbiased analysis above all.