Foreign investors worry about the US economy, but there is good news

Foreign investors worry about the US economy, but there is good news

Foreign institutional investors are adapting to market headwinds as they grapple with rising inflation and rising interest rates in the US, according to the latest research from AFIRE, the association of international real estate investors that focuses on commercial real estate.

AFIRE members include 200 organizations in 25 countries, and “all are well aware of the current market challenges,” writes Gunnar Branson, the organization’s CEO, in an analysis of her latest AFIRE International Investor Survey Summer 2022 Pulse. “For example, they know that US inflation has increased by more than 9% since January 2022; the Fed raised interest rates by more than they have in nearly 30 years; we have crossed a global threshold of more than six million deaths from COVID since the start of the pandemic; supply chains remain in disarray; July 2022 was the 451st consecutive month with temperatures above the twentieth century average; wildfires have punished countries around the world; water resources are dwindling to dangerous levels in some parts, while others are inundated with historic floods. And of course Russia started a war in Ukraine.”

Economic uncertainty is at the forefront, with both US-based and non-US investors forecasting challenges to deal closing in both the US and, to a greater extent, Europe. Foreign investors are more pessimistic than in previous surveys of both regions, but they are more optimistic about the US than about Europe. Meanwhile, Branson says, US-based investors are more pessimistic about the “inevitability” of a US recession (92%) than foreign investors (67%).

Noting that “questions about inflation six months ago yielded different answers when asked in July,” Branson notes that 86% of respondents said inflation was actually worse than expected this year, while six in 10 respondents saw an increase of observe the maximum rates and a flattening of institutional demand. Respondents also expect the availability of capital for development, refinancing and acquisitions to decline “across the board” this year, with development debt expected to decline the most. To make matters worse, more than three-quarters of respondents believe the US will enter a recession in the coming year.

But wait, there’s good news: “Even if rising capital costs affect new cross-border investment, it could also increase cross-border activity in new territories and markets,” Branson writes. “About 77% of respondents believe that the recession – if it does occur – will not be as severe as it was in the 1970s. This will lead to unique opportunities in strategic and niche markets, improvements in ESG practices and a deeper focus on multi-family, single-family and affordable housing.”

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