How Critical Is Foreign Investment to Commercial Real Estate in D.C.?

Washington, D.C.’s commercial real estate markets suffered a significant slowdown when foreign investment dried up in 2016, but they bounced back almost as soon as the foreign money returned.

In February 2017, Washington, D.C. mayor Muriel Bowser ceremonially broke ground on The Highline at Union Market, a 12-story mixed-use complex in the city’s NoMa neighborhood that will feature 318 luxury apartments and nearly 10,000 square feet of retail space once complete. Made possible by a $27 million Chinese investment, The Highline underscores the pivotal role that foreign money plays in Washington’s commercial real estate (CRE) markets.

At the ceremony, Bowser touted the project as a direct result of her November 2015 trip to China, during which her administration and a delegation of local business leaders pitched Washington CRE as an excellent opportunity for Chinese investors. As the trip came to a close, Bowser announced that Chinese investors had committed $155 million to the development of The Wharf and Skyland Town Center, projects she claimed would create hundreds of jobs in our nation’s capital.

Bowser’s pitch seems to have worked on investors—Chinese and otherwise—as NoMa alone has secured $150 million in foreign investment in recent years. The influx of capital has supported everything from the transformation of a trash-sorting depot into an REI flagship store to two new Hilton-branded hotels.

In fact, foreign investment has become so central to Washington CRE that its temporary contraction in 2016 appears to have prompted a substantial slowdown in the city’s multifamily market.

A Strong Showing Following an Unprecedented Downturn

Each year, the Association of Foreign Investors in Real Estate conduct a Foreign Investment Survey. In the edition published in January 2017, Washington ranked lower than New York City, Los Angeles, Boston, Seattle, and San Francisco, marking the first time in the survey’s 25-year history that the capital placed outside the top five American cities for foreign real estate investment. In 2003, 2004, and 2008, AFIRE ranked Washington the top city for foreign real estate investment in the world, and the city never placed lower than fourth globally between 2003 and 2012.

This unprecedented downturn was particularly felt in Washington’s multifamily market, as foreign investors were responsible for a mere 4 percent of multifamily sales in 2016. Not only did that represent a sizeable drop from 15 percent the previous year, but it placed Washington below the 2016 national average of 6 percent.

According to Reonomy data, sales of multifamily assets in Washington closely mirrored foreign investors’ spending during this period. Between 2013 and 2014, multifamily sales in Washington increased by 9.5 percent, a YoY growth rate that jumped to 13.6 percent between 2014 and 2015. From 2015 to 2016, sales still increased, but by a modest 2.6 percent. What’s more, YoY growth in multifamily sales jumped back up to 11.0 percent between 2016 and 2017, and the second quarter of this year saw the highest volume of sales since Q2 2005.

A Positive Outlook for the Future of Washington CRE

As the post-2016 recovery highlighted by our data might lead one to assume, Washington fared far better in this year’s AFIRE survey — it placed fourth after New York, Los Angeles, and Seattle.

A number of factors support a positive outlook both for the capital’s multifamily market and for CRE markets overall. Despite a flood of over 6,000 new multifamily units in 2017, Washington’s Class A vacancy decreased by 20 basis points over the course of the year, indicating strong continued demand for housing in the city.

Perhaps more importantly, the Trump Administration’s renewal of the EB-5 Immigrant Investor Visa Program—a program which played a central role in Mayor Bowser’s pitch to Chinese investors—lays the groundwork for continued foreign investment in Washington’s CRE markets. “What we do in [NoMa] is really the heart and soul of what EB-5 was intended to be used for,” explains Angelique Brunner, President of EB5 Capital, a firm that connects foreign investors with domestic developers. “[And] we will continue to invest in this neighborhood until it’s complete.”

Ultimately, 2016 serves as proof of the tremendous influence foreign investors wield over the fortunes of Washington’s commercial real estate markets. We shouldn’t be surprised to see future mayors replicating Mayor Bowser’s ventures abroad — and with good reason.

Rich Sarkis is the CEO of Reonomy. The views expressed here are the author’s own and not that of ALM’s Real Estate Media Group.