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more than likely to weigh the effects of each move it makes before adding any additional friction to current (if unspectacular) economic growth trends. Ten-year Treasury yields have been in flux as early concerns about the effects of Brexit have begun to smooth out. Yields, which had fallen to as low as 1.24 percent in the immediate aftermath of the Brexit vote, have risen back to over 1.5 percent in recent weeks. As concerns about global economic developments ease, we should expect those yields to push back toward a more normalized 1.75 to 2 percent range by year-end. The squeeze on cap-rate spreads remains of some concern for real estate investments should rates rise more rapidly than expected, especially as the “frothiness” we have seen in certain gateway, Class A markets emerges (see our cautionary note from early 2015). At present, little indication exists that a rate increase will push cap rates dramatically higher. Nonetheless, there are indications that yields may begin to drift upward. And, as pricing in first-tier markets stalls and yields hover in the sub–4 percent range in some of the major gateway markets—which are, in some cases, already in peak pricing territory—we should probably expect investors to move more aggressively into secondary and tertiary markets—and to opportunities beyond core assets to core-plus and value-add properties as well as some of the niche property sectors, including medical office, student and senior housing, and data centers.
Foreign investment in the United States.
Global economic and political uncertainty continues to drive capital to the United States. International capital flows into U.S. real estate assets will continue—and increase. The U.S. property market is the most stable and transparent in the world, with higher relative yields and price appreciation potential, making it an easy investment choice. And, while slowing growth in China and much of Europe may dampen currencies and incomes over there, there is still abundant non-U.S. capital looking for placement and very strong demand for U.S. assets, as 2015 proved with record inflows. That year, foreign purchases of U.S. real estate assets rose to more than $87 billion
over the 12 months ending in December, according to the Association of Foreign Investors in Real Estate (AFIRE), with China, Canada, Norway, and Singapore all riding the wave. That volume is up from just $4.7 billion in 2009, according to Real Capital Analytics. Among members of AFIRE, a substantial proportion expect to increase investment in the United States in 2016. Changes in the 1980 Foreign Investment in Real Property Tax Act (FIRPTA), which now allow foreign investors to be treated in a fashion similar to their U.S. counterparts, will likely lead to an increase in foreign investment in the U.S. real estate market as well.
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