Global institutional investors say they are planning major changes to their U.S. property portfolios as they anticipate a significant decline in office values.
That's expected to lead to more conversions of offices to residential and other uses, according to the Association for International Real Estate Investors, or AFIRE, a nonprofit trade group based in Washington, D.C.
The organization based the outlook on responses from a newly released survey detailing how global investors say they view U.S. property during a time of high interest rates that have slowed deals.
“While significant uncertainties persist, institutional investors, who benefit from a long-term horizon, see opportunity to realign their portfolios to meet the shift in asset class demands, in particular towards the continued need for a greater volume of residential properties in U.S. cities,” Gunnar Branson, CEO of AFIRE, said in summing up what investors are considering.
Nine in 10 global investors predicted they would convert some existing office properties to residential in the next five years, the AFIRE survey said.
Overseas investors have already significantly curtailed new U.S. investments this year, spending just $15.8 billion through the first three quarters, according to CoStar data.
That is far less than the $22.7 billion in the same time frame in 2020 when the COVID-19 outbreak closed offices and retail stores for prolonged periods.
Selling Overtakes Buying
Moreover, for the quarter that ended Sept. 30, non-U.S. investors sold more commercial properties than they bought by $1.3 billion, CoStar data shows. That has happened only three times before in the previous 22 quarters.
Over the past five years, U.S. office buildings have made up 28% of purchases from non-U.S. investors, according to CoStar data. This year, they have totaled 19% so far.
Investors from China, Singapore and Hong Kong have been among the most active buyers, accounting for more than 70% of purchases in the first half of 2023, according to the latest CoStar tally by country.
AFIRE survey respondents said they believe more than a third of office assets within their U.S. portfolios will require upgrading to meet future demands for health and sustainability.
Investors are also increasingly considering a variety of office transitions to other uses, including industrial storage-data center (72%), hospitality-leisure (69%) and vertical farming (33%), according to the AFIRE survey, which was conducted by PwC between Aug. 14 and Sept. 3 and included 100 responses from AFIRE's members. AFIRE membership includes institutional investors, pension funds, asset managers and other organizations from two dozen countries with a collective US$3 trillion in assets under management.
Investors are expecting a near universal decline in office values over the next 12 months with top-tier office properties in big markets offering the most stability, according to AFIRE. The areas where the most investors are expecting office property values to decrease include metropolitan Washington, D.C., and New York, followed by Atlanta, Boston, Miami and Austin, Texas.
The level of decline depends on the geographic market, with investors expecting values in Washington, D.C., to decrease more than other areas because of the region's high concentration of government tenants and return-to-office policies, according to AFIRE.