By Xinyi McKinny, Senior Managing Director China Direct Investment, San Francisco Bay Area and Los Angeles
The influx of Chinese investment in U.S. commercial real estate continues to generate interest, which I’ve seen firsthand through my support of new business opportunities with Cushman & Wakefield’s Chinese investor and occupier clients.
China ranked first among foreign investment in U.S. commercial real estate in 2016. We explore this further in the inaugural Cushman & Wakefield report: 2016 China – U.S. Inbound Investment Capital Watch.
The report lists the top five U.S. markets for China investment in 2016: New York City (46%); San Francisco Bay Area (15%); Los Angeles (7%); Chicago (5%); and Seattle (2%). These combined markets accounted for 76% of total foreign investment.
New York is the largest recipient of Chinese investment in U.S. commercial real estate and represents 46% of total transaction volume. Half of the top ten largest transactions in 2016 were based in Manhattan. These mega deals demonstrate the stability of New York’s real estate and China’s growing appetite for a slice of the Big Apple.
Although the U.S. East and West Coasts have historically been primary recipients of this investment, our report findings show that Chinese investment in Chicago has almost tripled in the last two years – from $377 million in 2014 to over $1 billion in 2016. Compared to the low cap rate in Manhattan and San Francisco, Chicago has been attracting investors seeking comparatively higher yields.
Although Chinese investors have been very active in the U.S., they are still feeling their way, according to Cushman & Wakefield’s President, Investor Services and Capital Markets of the Americas, Noble Carpenter. “The U.S. economy is well positioned and growing faster than most economies around the world, which makes it attractive to Chinese investors,” he adds. “It provides a safe haven.”
Marc D. Renard, Executive Vice Chairman at Cushman & Wakefield in Los Angeles, concurs, saying “On a risk-adjusted basis, the U.S. represents the most stable country for achieving durable cash flow, diversification, and wealth preservation.” He adds that the volatility in the global capital markets bodes well for increased off-shore investment in U.S. commercial real estate, encouraging more first-time buyers.
Investment sources continue to be more diverse. Since 2012, Chinese insurance companies have been allowed by the China Insurance Regulatory Commission (CIRC) to invest in overseas real estate markets.
More opportunity will come from China’s insurance industry, valued at approximately $1.83 trillion, according to figures from the CIRC. Only a fraction of funds are invested in U.S. real estate at this time. In 2015 and 2016, more than half of the investments came from Chinese life insurers. The largest transaction in 2016 was a cooperative of hotel deals from Anbang Insurance Group.
The Cushman & Wakefield report finds that office and hotel investment remain the most popular investment assets, while industrial investment has slowed significantly. Hotel investment was $8.6 billion in 2016, compared to $2.8 billion in 2015.
Mr. Renard says in Greater Los Angeles, large-scale mixed use development is still very much in vogue.
Growth will likely experience a slowing phase until September 2017 due to Chinese government capital outflow restrictions, although the overall impact should be muted given that investors were aware of the pending restrictions and had time to take action to meet their goals. Chinese investors typically focus on long-term investment so this short-term impediment will be viewed as such – temporary. Traditionally, long-term capital gain is outweighed by the immediacy of short-term cash flow.
Chinese investors also tend to follow industry trends and leverage these financially. For instance, they have seen the impact the tech/startup world has had on economic improvements across various U.S. markets. In San Francisco and in West Region submarkets such as Seattle, Austin, and Phoenix, the startup/tech company momentum is putting these cities firmly on the global map.
Chinese companies are closely following – and starting to mirror – where the shifts are happening as they pursue similar endeavors. This may account for why we have witnessed a spike in Chinese investment in Seattle – Microsoft and Amazon are located there – and the real estate options are still much cheaper in Seattle than New York and San Francisco.
Look for more implementation of this strategy as Chinese companies work towards establishing and strengthening their presence where the tech titans are significantly based.
An increasing number of American commercial real estate stakeholders recognize the financial potential of partnering with Chinese investment interests. And this may be the optimum time. With standard business practice in mainland China typically employing internal company resources, we may see movement away from engaging our local U.S. commercial real estate professionals.
While the Chinese have traditionally relied heavily on American expertise, a most likely and logical next step for Chinese developers will be to move on to manageable scale projects and build their in-house teams. This would allow them to gain complete control of the full life cycle of the development, as they do now in China.
Meanwhile, there continues to be substantial opportunity for the U.S. CRE industry to nurture partnerships – not only with multi-billion dollar conglomerates such as Anbang but with smaller scale operators just starting to explore the U.S.
As the Senior Managing Director for China Direct Investment, Xinyi is a licensed architect who has managed the full implementation lifecycle from pre-design to substantial completion work, including planning, schematic design, construction document development, consultant coordination and construction administration. She is a LEED Accredited Professional since 2008. Xinyi obtained her Real Estate study from University of California, Berkeley, Masters of Business Administration program (MBA). Xinyi is fluent in English and Chinese.