10 Takeaways from AFIRE’s 2021 International Investor Survey

The shifts in the use of space brought on by the COVID-19 pandemic last year led to worries that many U.S. commercial real estate assets might become less attractive to investors. The results of the latest survey from the Association for Foreign Real Estate Investors (AFIRE) show most of those worries turn out to be unfounded. Today, foreign buyers have a very high level of interest in investing in U.S. real estate, although their most preferred geographic markets might have changed—driven in some part by the search for higher yields and not necessarily by changes brought on by the pandemic. In fact, this was among the survey findings that surprised even AFIRE’s CEO Gunnar Branson. “Investor outlook is positive. This is not an easy time to be positive,” he said during a Zoom call with media on Tuesday to discuss the report’s findings. “But the investors we surveyed around the world are very positive about the U.S. market.”

Below, we look at the takeaways from AFIRE”s 2021 International Investor Survey, which was underwritten by Holland Partner Group. The survey included responses from more than 100 entities, of which 64 percent represented non-U.S.-based institutional investors, 23 percent were U.S.-based investors or investment managers and 13 percent were accounting, insurance and law professionals.

1. Sixty percent of those surveyed plan to increase their investment in U.S. commercial real estate in 2021. That compares to just 17 percent who plan to increase their investment in European real estate and 9 percent who plan to increase their investment in Asia Pacific properties. That is in large part due to the fact that with the help of its vaccination campaign, the U.S. is among the first countries outside of the Asia Pacific region to start getting the pandemic under control, according to Branson.
2. Over the next three to five years, about three-fourth of survey participants (74 percent) expect their level of investment in U.S. commercial real estate assets to increase, vs. 25 percent who expect it to stay the same and 1 percent who expect it to decrease.
3. The top factors driving the desire to increase investment in U.S. real estate include: the ability to diversify investment portfolios (58 percent), high quality of real estate assets (55 percent) and income return (53 percent).
4. However, the markets that might be seeing the most interest from foreign real estate investors in the short and medium term are changing. This year, Austin and Boston tied for the top spot for the level of planned real estate investment by those surveyed (30 percent chose them), followed closely by Dallas (29 percent.) Only 21 percent chose New York as their top market for investment in 2021, 19 percent chose Los Angels and 17 percent chose San Francisco. “What struck me [about this year’s results] was the increased interest in secondary markets, and even tertiary markets,” said Will McIntosh, global head of research with USAA Real Estate, who also participated on Tuesday’s Zoom call. “Now there is obviously a huge interest in this low interest rate environment in increasing their yields,” and the competition in core markets might be preventing many of the survey respondents from achieving the yields they are looking for, he noted.
5. In addition, both Branson and Zeb Bradford, chief investment officer with Metzler North America, cautioned that many gateway cities, including New York, Los Angeles and San Francisco, still made the top 10 list for planned real estate investment this year. Cross-border investors “don’t believe the core markets are gone forever,” said Bradford. “It may be just the emotional and psychological impact of the pandemic. Don’t count those out.” According to Branson, the reality that has emerged in recent months is that “The story that all of us have internalized about mass exodus from gateway cities has been overstated, at the very least. But also, the migration numbers that were point to, some of them were overstate and some of them were already planned,”—for example, some Millennials starting families were already planning to move out of big cities pre-pandemic. “Like [with] a lot of things, when we are in the middle of something big, we tend to over-draw things,” Branson added.
6. In this year’s survey, however, 23 percent of investors ranked Austin as #1 city on their list of investment targets for the next three to five years, with the city jumping from 10th place in 2020. Preference was also shown to Los Angeles, Boston, Atlanta and Dallas. New York and San Francisco didn’t even break the top six list, even though both were in the top five cities in 2020
7. New York, San Francisco, Chicago and Washington, D.C. topped the list of cities that foreign investors want to decrease their exposure to in the next three to five years, but that was largely in line with the results of the survey in both 2020 and 2019.
8. Among the properties surveyed investors plan to increase their exposure to in the next three to five years are multifamily (86 percent vs. 82 percent in 2020) and industrial (79 percent, the same as last year). Twenty-five percent and 24 percent of respondents would also like to increase their exposure to hotels and office buildings respectively vs. 20 percent and 26 percent who want to decrease their exposure to those sectors. “Hotel is ‘dead,’ but it’s not,” noted Branson. The expectation among many investors is that the sector will make a comeback as COVID-19 infection rates in the U.S. subside. 
9. More than half of respondents, however, a full 56 percent plan to decrease their exposure to U.S. retail vs. just 6 percent who are looking for an increase, the lowest figure of any property type.
10. Another important trend that the survey revealed was investors’ increasing emphasis on ESG criteria when deciding where to put their money. Twenty-seven percent of those surveyed noted ESG policies play a “very important” role in their decisions currently, but the number went up to 69 percent for investment planned for the next three to five years. Green building certification ranked as the top ESG criteria by importance (44 percent chose it), followed by sustainable construction and operations (37 percent). Becoming net zero and withstanding extreme weather events shared the third spot (24 percent of those surveyed chose those criteria as the most important). “I think what surprised me was the acceleration of ESG being an important topic,” noted Zeb Bradford. “It always was important because of our investor base being European. But the acceleration and the priority given to ESG issues was surprising. That train is moving and you are either you are aboard the train or you are being left behind.”