Source: Real Capital Analytics
Cross-border investment in U.S. real estate has almost doubled in the past year, according to a report from New York–based research firm Real Capital Analytics (RCA).

In 2014, cross-border investors accounted for 5% of all apartment transactions. This year, the number has jumped to 9%. “Often, these investors are pursuing partial interests in commercial properties for a variety of operational and tax considerations,” RCA said in the report.

Many cross-border investors are finding deals in secondary markets. “Both cross-border and institutional investors have been active in secondary markets, with 11% and 17% shares of these markets, respectively,” RCA said.

While these investors could gain more market share in the coming quarters, they’re not immune to market shocks and global volatility.

Pacific Power

Much of the offshore interest in American commercial real estate is coming from Asia. In the second quarter, outbound Asian investment in CRE grew 8.9%, to $10 billion, according to CBRE. In the first half of the year, the U.S. received $6.1 billion of that capital.

“As more Asian investors look abroad to diversify a growing pool of domestic wealth, overseas market dynamics such as stable fundamentals, regulatory support, and market transparency will continue to drive them to pursue offshore opportunities,” CBRE said in a report.

But Asian investments in apartments don’t have quite the same trajectory. After sending $249 million to U.S. apartments priced over $10 million in 2013 and $252 million in 2014, Asian investors invested only $88.6 million in the first six months of 2015, according to CBRE. 

“I understand some Asian funds are going to this sector by investing in funds, while others such as Chinese developers get exposure by engaging in residential development projects,” says Ada Choi, senior director and leader of real estate capital market analytics within CBRE’s Asia Pacific team.

In late summer, the Shanghai Composite fell nearly 40% below its June high. Brian Ward, president of capital markets and investment services at Collier's International, saw some impacts on Chinese high–net worth investors but no real effects on the institutional market.

But that doesn’t mean there aren’t potential signs of trouble. “Over the past 12 to 18 months, we’ve seen a broader Chinese philosophy encouraging the export of capital globally—out of China and into U.S. and European real estate,” Ward says. “Over the last 30 days, that policy may be shifting for the near term.”

Case in point: Two deals recently busted up CRE deals in London. “We’ve seen a couple of deals in the last 14 days with major Chinese investors that have blown up for no apparent reason,” Ward says. “I’m not saying [the Chinese backing off of CRE investment] is a long-term change in policy; it may be a short-term blip. It’s just a little too soon to tell.”

Other Sources of Capital

While the Chinese own a big part of the market, they’re not alone. “Asians remain the No. 1 [foreign] investor, though Canada is also really big,” Ward says. “Then, you’re seeing some of the big European sovereign funds getting a lot more aggressive in the U.S.”

In July, Toronto-based Tricon Capital Group announced a new strategic initiative focused on the development and management of a portfolio of Class A purpose-built, luxury rental apartments across the United States and Canada. “We see much better risk-adjusted opportunities in the U.S. than in Canada,” says Gary Berman, Tricon's president and CEO. “We're focused on U.S. housing. If there’s any bright spot in the market right now, from a public-market perspective, it’s U.S. housing. If interest rates remain low and we’re in an environment with lower oil and gas prices, that’s a positive for U.S. housing.”

International influence is certainly growing, and, minus any international market shocks, that trend should continue.

Still, Ward is careful not to overstate the importance of international investors. “Foreign investors aren’t really affecting domestic multifamily as of yet,” he says. “They’re out there and kicking the tires and looking at transactions. They understand the broader dynamic supporting supply and demand. But they’re really not a pervasive force in multifamily.”

That could ultimately change, though.

“They’re certainly becoming more and more of a force in the broader commercial real estate markets among the four major real estate classes,” Ward says.