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Chinese investment activity in US commercial real estate market slowed in 2017

Chinese investors pumped $7.3 billion into the U.S. commercial real estate market in 2017, down 55% from 2016, according to the latest report from Cushman & Wakefield.

The decline was driven by new capital controls imposed by the Chinese government, increased regulatory scrutiny by the Committee on Foreign Investment in the U.S. and more attractive opportunities in other countries.

Hotel acquisitions plummeted 84% year over year in 2017, accounting for 71% of the overall drop in Chinese investment in the U.S. Apartment and development site purchases by Chinese investors also dipped 59% and 60%, respectively, in 2017.

Chinese investments in central business district offices fell 35% year over year, but it was also the most dominant property type by deal volume in 2017, with a 42% share. Suburban office deals by Chinese investors, meanwhile, soared 136% year over year. The overall office segment accounted for 50% of all Chinese investment capital in 2017.

Retail volumes were up 29% year over year in 2017, while industrial volumes stayed flat.

Chinese investment in 2017 was concentrated in five U.S. markets. New York dominated the overall deal volume at 46%, San Francisco accounted for 20% and Los Angeles made up 6%. Chicago and Seattle accounted for 5% and 1%, respectively, of Chinese capital during the year.

Investment from China and Hong Kong in the New York City metro, which has been the biggest beneficiary of Chinese capital in the U.S. commercial real estate market for years, declined 54% year over year in 2017. San Francisco Bay Area investments from Chinese backers were down 52% during the year.

By investor type, Chinese developers/owners/operators dominated the U.S. acquisition volumes in 2017, increasing their investments to $4 billion from $2.6 billion a year earlier. Sovereign wealth funds and insurers, which emerged as major sources of U.S. real estate capital in 2015 and 2016, became less active in 2017.

Despite the slowdown, however, U.S. investments from China remained historically high in 2017. The 10 largest U.S. transactions in 2017 included one involving Chinese conglomerate HNA Group Co. Ltd. and one involving Taikang Asset Management Co. Ltd., according to the report.

The report argued that Chinese investors will likely continue to see compelling investment opportunities in the U.S. in 2018, thanks to expectations for accelerated economic growth in the U.S., as well as the liquidity, safety and diversification benefits of its commercial real estate markets.

Deals that are most likely to receive state approval, including logistics entities and properties, research and development facilities and student and senior housing properties, are more likely to see increased investment activity in 2018, the report noted.

"Any reduction in demand from Chinese capital is likely to be backfilled by other foreign capital sources as the U.S. remains the top destination for global capital," Cushman & Wakefield said.