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October 26, 2017

Overseas investors have piled into U.S. real estate at a greater pace than any other global market year-to-date.

There was US$6.5 billion of cross-border capital that flowed into the United States over the quarter, with the office sector receiving the lion’s share of the volume with 40.0 percent of inbound capital, while participation across sectors dropped modestly to 12.2 percent.

Asian capital continues to drive a large share of acquisitions, accounting for more than 40.0 percent of total foreign investment. The Canadian and Germans aren’t far behind. In aggregate, these three groups are driving nearly 84.0 percent of cross-border activities this year.

Around the world real estate investment has been surging, and demand hasn’t let up. In the Americas, there is US$63.1 billion of capital hunting for deals.

The largest volume of pent-up demand for real estate is in Europe, where there is US$274 billion available. In Asia Pacific there is US$103.4 billion, and in the Middle East it’s at US$39.6 billion.

What’s causing the investment chasm? Investors view commercial real estate as an attractive investment given the stable cash flow and low interest rates compared with volatility inherent in alternative investments. But the property opportunities just aren’t readily available.

Supply fundamentals are generally in check, and thus core pricing remains elevated. This has pushed investors into riskier strategies and paralleled a continued increase in value-add fundraising. However, investors are being selective, disciplined and more conservative in underwriting. This is creating a competitive environment for deploying capital, spurring increased levels of less conventional deal structures and strategies in today’s marketplace.

“There is a wide gap between the current-to-target allocations of funds into commercial real estate, and many remain below their intended investment levels,” said Jonathan Geanakos, President, JLL’s Americas capital markets business. “The amount of pent-up demand in Europe and Asia should drive mid-term liquidity from those regional investors in the U.S. market and has the potential to positively impact asset pricing in the mid- to long-term.”

Gunnar Branson, the CEO of the National Association of Real Estate Investment Managers concurs.

“There’s a disconnect between capital demand for assets and real estate supply,” he said. “That presents an interesting set of challenges for institutional real estate investment managers and their investor clients. The market today is pushing everyone to think deeper and go beyond the obvious deal. Reasonable, risk-adjusted returns are there for those investors able to take a creative, intelligent approach.”

By the close of 2017, JLL forecasts global investment volumes will be in-line with 2016 volumes of US$650 billion. In the Americas, activity levels are expected to see modest declines of approximately 10 percent. However, this decline in activity is contradictory to the continued appetite for U.S. commercial real estate assets in the current marketplace.

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Jonathan Geanakos

President, Americas Capital Markets, JLL

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