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Monday, May 5, 2014

Increasing flow of Canadian dollars into the United States seeking investments in commercial properties

By Mark Rose (Toronto)

As a Chair and CEO leading a Canadian-based global real estate services firm and someone who lives in two countries, I have the privilege of reporting on North American trends from a global perspective.  Therefore, when I was preparing the Avison Young Q2 2014 Audiocast, I wanted to address the increasing flow of Canadian dollars seeking investments in commercial properties in the United States.

What did I learn?

Canadian investment in U.S. real estate is way up! It surged to $12 billion in 2013 from $9.5 billion in 2012an increase of more than 25%. For several years now, Canadian investors — both institutional and private — have been gobbling up U.S. commercial properties at break-neck speed. 

Canadians, as a whole, have been the most active foreign investors in U.S. real estate every year since 2010, and were never far behind in the years before that. In fact, Canadian investors represented nearly one-third of the aggregate $90.6 billion that international buyers invested in U.S. real estate from 2010 to 2013.

Numerous factors behind surge
Now, numerous factors have driven the surge in Canadian demand. Among those is the relative value of U.S. real estate, given depressed prices during the Great Recession that we are just now exiting.

Also, Canadian property markets are smaller, and there simply was more Canadian capital pursuing attractive real estate assets in its home market than there were such assets available for purchase.

Hence, that capital has been actively looking south of the border. Case in point: Canada-based Artis REIT weighted its $533-million portfolio of 2013 acquisitions 60% to Canada and 40% to the U.S. During one of its recent analyst calls, Artis indicated it will place a heavier weighting to the U.S. in 2014 acquisitions.

Now, it is risky to generalize on the motivation of Canadian investors because there are countless types of investors — insurance companies, pension funds, high-net-worth individuals and REITs, among others — pursuing a plethora of investment strategies. With that caveat, it’s fair to say that investors view Canadian properties very positively, and regard the U.S. as an attractive, familiar market which still offers liquidity and boosts yield. By investing in U.S. commercial real estate, Canadians can fill their needs and obtain a premium over similar investments in Canada.

Canadian euphoria easily explained
Why the U.S. and why now? In some ways, Canadian euphoria for the U.S. commercial property markets can be easily explained by the relative proximity and familiarity of the target markets; the ability to achieve a scale not available in domestic investments; preference for an English-based legal system; and the generally high levels of transparency and liquidity.

At the same time, the increasing flow of Canadian capital is reflective of a global trend of capital flight from virtually all corners of the world to the U.S. property markets for safety, and better, risk-adjusted returns. 

According to numerous credible surveys, the U.S. remains – far and away – the most resilient, stable and secure country for international investment. Just look at the surging popularity of the EB-5 Visa program with Asian and Latin American investors.

You may ask: Is there any downside to the rush from Canadian investors? 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 that America faces — the U.S. remains a global beacon for investment safety and stability.

Is this strong interest in American commercial real estate creating more competition for U.S.-based buyers? Well, yes! Of course! Most Canadian investors are both well capitalized and credible. Their significant presence in the U.S. investment market for several years now has helped buoy prices on existing properties. And at the same time, Canadian investment has helped spur the development of new opportunities. So it’s all good!

U.S. market needs foreign capital
Finally, are we getting too dependent on foreign capital in the U.S.? Well, 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, etc. But sticking to real estate for now, the U.S. 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 U.S. properties, such as Rockefeller Center in New York. The U.S. seems to have come out of that so-called over-dependence just fine.

We see Canadian demand in U.S. real estate remaining strong for the foreseeable future. A big variable will be how quickly U.S. 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 U.S. allocation and reallocate somewhere else. Emerging markets, such as Mexico and Brazil, could be the beneficiaries of such a potential pivot.

For more on this topic, please listen to my Q2 2014 Audiocast.

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