Hime: “The economic fundamentals of the US are compelling compared to most other developed countries.” Hime: “The economic fundamentals of the US are compelling compared to most other developed countries.”

SCOTTSDALE, AZ—“Black swan” geopolitical events could be the only potential fly in the ointment for foreign investors in US real estate, which shows no sign of slowing anytime soon, USAA Real Estate Company’s CFO Jim Hime tells GlobeSt.com. Hime will be moderating the “Key Drivers and Players in Foreign Capital Investments” session at NAIOP’s Commercial Real Estate Conference 2016, September 26-28 here in Scottsdale. We spoke exclusively with him about those drivers and how he sees this phenomenon playing out.

GlobeSt.com: What do you see as the key drivers in foreign capital investments?

Hime: There are several. One is the performance that foreign investors and all investors have seen out of real estate relative to other asset classes since the end of the GSE global financial crisis. Another is the ongoing global search for yield, which is not being satisfied by the fixed-income markets or the stock market. Real estate looks good in comparison for current return on investment. Global and domestic investors have seen the US economy grow slowly but steadily, with good job and household formation. The economic fundamentals of the US are compelling compared to most other developed countries.

We also have a pretty healthy real estate market and have shown a fair amount of discipline where supply is concerned. Some good markets are getting overbuilt, but the economy is still growing steadily, creating office-using jobs and both multifamily and single-family housing formation. We also have the whole story in the industrial space, which is an area that foreign capital has discovered in the last few years.

Foreign capital has begun to understand value of long-term leases with good-credit tenants in places most hadn’t heard of like Central Pennsylvania. The combination of all these things, plus the fact that you have reliable currency here, is enticing. You also have pockets of foreign capital representing trade surpluses that have to be invested somewhere, and real estate is part of that allocation for many globally; the US is one of the places you want to be if you are a foreign investor in real estate.

GlobeSt.com: Who do you see as the key players in these investments?

Hime: There is a wide variety of investors. If you go back to the accumulation of trade surpluses I mentioned above, it’s easy to see why a lot of the recent investing has been from sovereign-wealth funds and from large, emerging financial institutions—particularly in the Far East—who have an appetite for real estate. There are also Korean pension funds and mutual-aid societies, and the Canadians have been active south of the border. There are also the pension schemes in Canada, and the Dutch pension funds have been somewhat active as well.

GlobeSt.com: What geopolitical events could most influence these investments over the next year?

Hime: The thing about black swan events is that they are called that because they’re so hard to predict. A major terrorist attack in a large population center in the US or an unforeseen political issue in the US are the two things that could be problematic for real estate values and returns to real estate investors. Only some kind of global event that creates a crisis of trust like we had in 1998 with the Russian ruble crisis—and that causes investors to call into question the soundness of their investments or the ability of their counterparties to perform—could derail foreign investment here. What happens then is that people become very hesitant to transact, the credit market typically seizes up, and you have period in which you can’t price anything. The last time that happened—in 2008 and 2009—we saw dramatic losses in real estate, but those in a position to protect their equity from foreclosure because they had a balance sheet or were financed with short-term borrowings did OK. Those losses have been reversed as cap rates went back down again. But the geopolitical landscape is much more complicated than I could predict. Economic or political disruption in China could also create that crisis of trust.

GlobeSt.com: What else should our readers know about foreign capital investments?

Hime: I feel like it’s here to stay. The first deal I worked on of this type was in 1977. As the markets become globalized, US real estate—for all the reasons that make this country so attractive for asset allocators in general—will continue to be appealing to foreign investors for the foreseeable future. Massive surpluses that will hold down terms in stocks and bonds and make real estate more attractive will encourage them to try to access returns in a part of the market that’s not as easy to tap.