Are We Too Dependent on Foreign Capital?

MIAMI—Canadian investors are grabbing plenty of US commercial real estate, but not just any US real estate will do. In part three of this exclusive interview series, we're tackling this question: What's the downside?

GlobeSt.com asked Dan Carlo, a principal with Avison Young for his take on these topics. If you missed part one, you can still read it: Why Canadian Investments in US Are Surging. You can also read part two: Are Canadian Investors Moving Toward Office?

GlobeSt.com: Is there any downside to the rush from Canadian investors?

Carlo: We do not feel there is. By and large, Canadians are stable, patient and sophisticated investors. Again, we see the surge of Canadian capital as a reaffirmation that—notwithstanding the issues our country faces—the US remains a global beacon for investment safety and stability.

GlobeSt.com: Is it creating more competition for US-based buyers?

Carlo: Of course! Most Canadian investors are both well capitalized and credible. Their significant presence in our investment market for several years now has helped buoy prices on existing properties. At the same time, Canadian investment has helped spur the development of new opportunities. It's all good!

GlobeSt.com: Are we getting too dependent on foreign capital?

Carlo: An exhaustive response to the question would require a broader discussion of international and fiscal policy, as well as an analysis of the impact of foreign capital on bonds, stocks, exchange rates, et cetera. Sticking to real estate for now, the US real estate market is of such a size that there is ample space—if not a need—for foreign capital to play a meaningful role.

Foreign capital has been a market stabilizer. Similar concerns were raised in the 1980s when Japanese investors were taking major positions in prominent US properties such as Rockefeller Center in New York. We seem to have come out from that “over-dependence” just fine.

GlobeSt.com: How long do you expect this interest from Canadians to last?

Carlo: We see Canadian demand in US real estate remaining strong for the foreseeable future. A big variable will be how quickly US real estate prices recover from the Great Recession troughs and return to replacement-cost levels.  

At that point, we can reasonably expect Canadian capital—as well as that from other global players—to taper its US allocation and reallocate elsewhere. Emerging markets such as Mexico and Brazil should be the beneficiaries of such a potential pivot.

GlobeSt.com: Is this just a blip on the radar screen or a longer-term strategy?  

Carlo: The reality for Canadian investors is that their domestic market is highly concentrated in a few industries and, for the most part, in the hands of the largest domestic players.  So, foreign investment is a portfolio imperative. The US offers the largest and most familiar investment alternative and, as such, can reasonably be expected to continually receive large amounts of investment across all real estate asset classes from Canadian investors.