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2018 Sets Record for Global Investment, Driven by Strong U.S. Market

Global MarketFlash | 31 January 2019
  • 2018 beat 2015 as the best year of the current cycle for global commercial real estate (CRE) investment.
  • The U.S., accounting for 52% of global transactions, registered 15% growth in annual investment volume (including entity-level transactions). Investors diversified from gateway cities in H2.
  • EMEA investment matched 2017’s high volume, with Europe up by 1%. Residential passed retail as the second-largest CRE sector in Europe.
  • Asia Pacific went through a sluggish year with investment volume down by 11%. Singapore’s outbound investment reached a new record.

2018 has surpassed 2015 as the best year for global commercial real estate (CRE) investment in the current cycle. Global investment volume was up 5% from 2017 and 3% from 2015 in fixed exchange rates.1

The U.S., accounting for 52% of global transactions, posted 15% annual growth in investment volume (including entity-level transactions). In the second half of 2018, global investors turned to the U.S. for yield sourcing and fairly-priced M&A opportunities. Softness prevailed in Asia Pacific, but investment picked up pace in the fourth quarter. Europe recorded a marginal annual increase of 1% on 2017’s record high.

Figure 1: Global Commercial Real Estate Investment (US$ Billions - Fixed FX)

2018 Sets Record for Global Investment-01312019-F-1

Source: CBRE Research, RCA (Americas), Q4 2018.

The Americas region registered 13% annual growth in transaction volume, entirely credited to robust investment growth (15%) in the U.S., where three trends were evident.

1. Mergers and Acquisitions (M&As)

The value of U.S. entity-level transactions tripled in 2018, led by cross-border investment (57%)—particularly from Toronto-based Brookfield’s US$11 billion acquisition of Forest City Realty, including debt, which topped all CRE transactions in Q4. Brookfield now is the second-largest property owner in New York after city government.

Including Brookfield, a total of six investors from Canada, France and China invested a record US$41 billion in U.S. entities, betting on the resilience and long-term growth of U.S. income-generating assets.

2. Growth in Multifamily and Hotels

Excluding entity-level deals, U.S. investment volume still increased 5% due to exceptional domestic appetite for apartment and hotel properties.

Non-entity transaction volume rose 11% for multifamily and 39% for hotels. Private domestic developers and owners, many of whom specialize in these sectors, invested heavily in markets that boast strong growth in population, employment and income, such as Houston, New York and San Francisco (see Figure 2).

3. Market Diversification

H2 2018 exhibited a clear trend toward diversification from gateway cities. While investors kept trading in primary markets, they targeted secondary markets for higher yields. Compared to the six gateway cities (New York, Los Angeles, San Francisco, Chicago, Washington, D.C. and Boston) that saw 22% investment growth in H2, Houston, Phoenix, Charlotte, Raleigh-Durham, Nashville and San Antonio together recorded 35% growth in total volume (albeit equivalent to 28% of the gateway investment). The average office cap rate in these six secondary markets (4.75%) was 65 basis points above gateway markets’ (4.10%).

Figure 2: Top Capital Destinations by Property Types (US$ Billions, Full-Year 2018)

2018 Sets Record for Global Investment-01312019-F-2

Source: CBRE Research, RCA (Americas), Q4 2018.

Investment in the EMEA region matched 2017’s high note, with Europe’s 1% growth offsetting slower activity in the Middle East and Africa. Spain (57%), Germany (6%), Poland (42%), Belgium (55%) and France (5%) were major drivers, ranked by full-year escalations in transaction values.1 2018 volume reached US$23 billion in Spain, the highest on record. Finland and Luxembourg posted the strongest Q4, respectively.

Investment in the U.K. fell by 6% in 2018 and 10% in Q4. London remained a bright spot with 18% yearly growth and 56% quarterly growth over Q4 2017.

Domestic capital led investment growth across all sectors except for retail, because of regional M&As like Unibail’s merger with Westfield. Only a select list of cities, such as Paris and Munich, saw strong growth of capital inflows to core office properties from North American and Asian investors.

By the end of 2018, residential passed retail as the second-largest CRE sector in Europe, though still far behind office. Germany and the U.K. led investment activity with steady growth, while Netherlands and Spain emerged rapidly. Reduced affordability of home ownership, a shortage of supply and positive demographics will fuel further investor interest in the residential sector.

Asia Pacific had a sluggish year with annual investment volume down by 11% and Q4 volume down by 15%. Korea (51%), Taiwan (69%), New Zealand (71%) and Vietnam (11%) had solid yearly growth while other markets lagged, especially Hong Kong (-26%) and Japan (-19%). Besides the U.S.-China trade conflict and China’s slowing economic growth, relatively high pricing and low yields in the region’s prime markets like Hong Kong posed product-sourcing challenges.

In Q4, activity picked up pace in Singapore and Australia, while investment surged in China. With 40% year-over-year quarterly growth, China recorded the strongest Q4 and ended the year with a better-than-expected annual decrease of 4%. Rebounds in the three countries were largely driven by intra-regional transactions of core office buildings in Shanghai, Downtown Singapore and Sydney. Singaporean investors were particularly active in these top transactions.

2018 was a record year for Singapore’s outbound investment, with US$22 billion worth of overseas acquisitions. Investment in the U.S., China, U.K., Germany and Australia made up 80% of the total capital outflows. Strategically, Singaporean investors focused on prime assets in Asia Pacific while expanding footprints outside the traditional gateway markets in the U.S. and Germany, holding diversified interest in industrial, office, mixed-use, hotel and apartment properties—good examples for global investors.

Excluding entity-level transactions, 2018 global investment volume is in line with our most recent forecast of matching 2017 volume. On such a strong base and tightened financial conditions, we predict a mild drop of up to 5% in global investment volume this year. Potential upsides include fiscal stimulus of major economies and the brightened outlook for a U.S.-China trade deal that will boost investor sentiment. Meanwhile, the lack of a trade deal will draw the downside and the rise of real interest rates should be watched closely.

1Local currency values are converted to US$ all using the most recent quarterly FX rates of Q4 2018. This calculation eliminates currency impacts over time and generates the same growth rates as in local currencies.

Figure 3: Total Value of Commercial Real Estate Investment Transactions (US$ Billions)2

2018 Sets Record for Global Investment-01312019-F-3

Source: CBRE Research, RCA (Americas), Q4 2018.
1 Local currency values are converted to US$ all using the most recent quarterly FX rates of Q4 2018. This calculation eliminates currency impacts over time and generates the same growth rates as in local currencies.
2 Values include entity-level transactions and exclude development sites.

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For more information about this MarketFlash, please contact:

$name
Richard Barkham, Ph.D.
Global Chief Economist & Head of Americas Research
+1 617 912 5215
Wei Luo, Researcher
Wei Luo
Associate Director, Capital Markets
+1 212 984 8153