Foreign Investors Are Fretting About The US Economy, But There's Good News

Foreign institutional investors are adapting to market headwinds as they grapple with mounting inflation and rising interest rates in the US, according to the latest survey from AFIRE, the association for international real estate investors focused on commercial property here.

AFIRE members comprise 200 organizations across 25 countries, and “all are well aware of the current market challenges,” Gunnar Branson, the organization’s CEO, writes in an analysis of its latest AFIRE International Investor Survey Summer 2022 Pulse. “They know, for example, that since January 2022, US inflation rose by more than 9%; the Fed hiked interest rates by more than they have in almost thirty years; we crossed a global threshold of more than six million people dead from COVID since the start of the pandemic; supply chains remain in disarray; July 2022 was the 451st consecutive month with temperatures above the twentieth-century average; wildfires have punished countries around the world; water supplies are dwindling to perilous levels in some parts while others are underwater with historic floods. And of course, Russia started a war in Ukraine.”

Economic uncertainty is at the forefront, with both US-based and non-US-based investors predicting challenges to dealmaking in both the US and, to a greater degree, in Europe. Foreign investors are more pessimistic than in previous surveys about both regions, but they are more optimistic about the US than Europe. Meanwhile, Branson says, US-based investors are more pessimistic about the “inevitability” of a US recession (92%) compared to foreign investors (67%).

Noting that “questions asked about inflation six months ago generate different answers when asked in July,” Branson notes that 86% of respondents said inflation this year has actually been worse than expected, while six in ten respondents are observing an uptick in cap rates and a flattening of institutional demand. Respondents also expect the availability of capital for development, refinancing, and acquisitions to decline “across the board ” this year, with debt for development expected to decrease by the most. To add insult to injury, more than three-quarters of respondents believe that the US will enter a recession within the next year.

But wait, there’s some good news: “ even if the rising cost of capital is affecting new cross-border investments, it may also increase cross-border activity in new areas and markets,” Branson writes. “Roughly 77% of respondents believe that the recession—if it happens—will not be as severe as it was in the 1970’s. This will lead to unique opportunities in strategic and niche markets, improvements in ESG practices, and a deepening focus on multifamily, single-family, and affordable housing.”

Energy independence was also a key priority of survey respondents, with nearly two-thirds reporting they are already engaged in actively improving their energy efficiency. Eighty-two percent of survey respondents believe the global energy crisis will accelerate the need for investors to address an ESG agenda. And 59% are prioritizing investments that already meet specific sustainability certifications standards like LEED and BREEAM.

“Non-US-based investors are more likely to focus on capital expenditure for sustainability improvements (43%) compared to US-based investors (31%), though the latter group has more of a priority to dispose of outmoded or inefficient assets,” Branson says.