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Foreign Investors Remain Bullish on US Real Estate Despite Increasing Caution

Investor Uncertainty Increases Along With Interest Rates as New US Administration Prepares to Take Office
January 3, 2017
Reflecting a lack of suitable global alternatives and a proven track record of steady returns generated by US real estate, the latest annual survey of overseas investors by the Association of Foreign Investors in Real Estate (AFIRE) confirmed once again that the United States remains by far the world's most popular destination for foreign real estate capital.

An overwhelming 95% of respondents to the AFIRE survey said they planned to increase or maintain their level of U.S. investment, and 66% said their sentiment was unchanged or more optimistic about the prospect for US real estate.

However, the survey results also indicate investor caution about U.S. real estate is rising. One-third of those surveyed in fourth-quarter 2016 by the James A. Graaskamp Center for Real Estate at the Wisconsin School of Business said they felt more pessimistic about U.S. property markets, up from 8% in the late-2015 survey.

AFIRE CEO James Fetgatter noted that, with the uncertainty over the policies and legislative agenda of a new administration, interest rates on the rise and narrowing spreads between interest and capitalization rates, "it is no surprise that investors have signaled a note of caution."

New York City Rated Top Investment Market for 7th Consecutive Year
In addition to securing its status as the leading U.S. city for foreign capital for a seventh consecutive year, New York City ranked as the world's top city for foreign capital for the third year in a row. Los Angeles again ranked #2 among U.S. cities for the second straight year, followed by Boston, Seattle and San Francisco.

Berlin placed a somewhat surprising second among global cities, followed by London, Los Angeles and San Francisco.

Also notable was the falling stature of Washington DC. For the first time since the survey's inception in 1992, Washington, DC dropped out of the top 5 U.S. cities as a preferred global destination for foreign commercial real estate investment, coming in at #6 after ranking #4 in the late 2015 survey. DC alos fell to #15 globally after rising to eighth place in the previous survey.

Fetgatter tells CoStar that the continued decline of DC, as well as the continued ascension of Berlin, were both unexpected results in the latest survey.
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DC ranked as the top destination for global capital among the world's cities several times during the early 2000s, but has not been ranked among the top five global cities in terms of investment attractiveness. It has ranked no higher than #8 since 2013, following an extended period of budget disputes and lower federal spending.

Despite the shift in ranking, Catherine Pfeiffenberger, AFIRE chairman and senior vice president of Skanska USA Commercial Development, noted that the District's stable fundamentals will continue to attract capital from around the world, adding that the incoming Trump administration’s expected increased spending on defense and aerospace may also benefit the market's muted leasing activity over the past several years.

London, ranked either first or second among global cities for the last five years, took a hit from the Brexit shock, slipping to third place, and fifth overall in terms of its potential for stable and secure real estate returns.

In other survey highlights:

* Industrial property edged out multifamily to take first place among property types while hotels remained the least favored property type;

* More than half of survey respondents reported plans to increase both value-added and opportunistic allocations in the coming year, though core properties remain the prime investment targets of cross-border capital;

* Respondents cited several smaller urban markets with strong job growth and solid demographics, including Nashville, Portland, Charlotte, San Antonio, Madison, WI and Pittsburgh, as having investment potential.

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