Amsterdam: “The common thought [is] that foreign capital has virtually disappeared in the past year. That is simply not the case.”
NEW YORK CITY—Has foreign capital disappeared? How uncertain are the equities markets? What areas are experiencing higher borrower costs? To what extent are investors experiencing volatility? These are the questions on investors’ minds in the current real estate climate.

In this exclusive, David Amsterdam, president–investments, leasing and Eastern region, Colliers International, recently discussed some of these issues in an overall look at the state of the market. What is the influence of foreign capital? How is that affecting the overall state of the market?

Amsterdam:  I believe there is a misunderstanding as to foreign capital’s influence and presence in the real estate market over the past few years. The common thought being that foreign capital has virtually disappeared in the past year. That is simply not the case. If you were to focus on New York specifically, the actual percentage of foreign capital in the sales market has not decreased. On the contrary, as a percentage of sales, foreign capital actually increased approximately 10% between 2016 and 2017. The movement has been in total aggregate sales, trending down significantly from $60 billion in 2015 to $23 billion in 2017. With this steep decline, foreign capital has contributed a fairly static percentage, between 40% and 45%, of the funds associated with these transactions. There continues to be no shortage of investment capital, foreign or domestic, interested in targeted areas across the real estate spectrum. Following a historically low 2017, how have the capital markets been impacted?

Amsterdam:  Within an environment of stagnant rent growth and increasing construction costs, cap rates are expected to remain higher than the trailing two-year period. Borrowing costs are at their highest level in over five years and cap rates continued to experience an approximate 25-basis-point shift upwards. Clearly there is a bid/ask spread, with investors pushing for higher yield on acquisitions due to increased costs. With all that said, there are several geographic areas that continue to see near-record level pricing in the markets where assets are actually trading, including New York City. What do you see in your crystal ball for the remainder of this year and into first quarter 2019?

Amsterdam:  We are sitting in a market of uncertainty. Investors are feeling the volatility in the equities market and keeping a watchful eye on the pace at which the Fed continues to raise rates. We will see cap rates continue to reflect the impact of interest rates trending upwards 25 to 50 basis points, year-over-year. Even so, demand will remain high, with the lack of trophy assets likely to hit the market in the short term, notwithstanding the gradual increase in the 10-year Treasury. Look for non-traders to monetize their assets, likely in the form of selling a non-controlling interest, and free up fresh capital to deploy in alternate markets in an effort to diversify their portfolios. In addition, keep an eye on corporate users entering the market, following the trend of Google’s purchase of Chelsea Market in Manhattan in a $2.4 billion all-cash transaction.