British investment giants Legal & General and Schroders are setting their sights on the U.S. commercial property market, pledging to invest hundreds of millions of dollars. Their focus, however, remains cautious, particularly regarding the struggling office sector, which has been significantly impacted by rising borrowing costs and the shift to remote work after the pandemic.
Both firms, managing assets exceeding £1.9 trillion (approximately $2.5 trillion), are ramping up their U.S. real estate teams, confident that market conditions will improve, especially as interest rates are projected to decline. António Simões, CEO of Legal & General, emphasized the importance of U.S. real estate as a vital area for growth, noting the underlying strength of the market’s fundamentals.
The global property landscape has faced challenges, with numerous factors contributing to price declines, particularly in the office market where fears of overcapacity linger. Yet, recent indications of potential interest rate cuts from the U.S. Federal Reserve have sparked renewed optimism among investors. Analysts believe that the U.S. real estate market tends to recover more swiftly than its European counterparts, as market players are often quicker to adjust asset valuations.
Legal & General aims to significantly expand its U.S. real estate equity portfolio over the next few years, parallel to an enhancement of its real estate debt operations. They’ve established a dedicated team in Chicago, focusing on rental properties that have demonstrated resilience compared to the beleaguered office sector.
Schroders is on a similar trajectory, planning to grow its fledgling U.S. real estate equity investments from smaller amounts to several hundred million dollars in the near future. The firm has already made strides, investing in a pan-American data center portfolio as part of their initial entry into the market.
Michelle Russell-Dowe, co-head of private debt and credit alternatives at Schroders, pointed out that the beginning of the Federal Reserve’s journey towards stabilized interest rates could unlock significant pent-up demand in the real estate sector. With banks retreating from lending due to stricter capital regulations, new opportunities are emerging, particularly in real estate debt.
As they pivot away from traditional office spaces, both firms are keeping an open mind regarding investments in high-quality office developments, should the right opportunities arise. Phoenix, a British insurer managing around £290 billion, has also expressed intentions to increase its footprint in U.S. real estate, though specific investment plans remain under wraps.
While challenges persist in the real estate market, the proactive strategies and insights from these heavyweights indicate a promising path towards recovery and growth in U.S. commercial property, reaffirming its potential as a lucrative investment landscape. As investors recalibrate their approaches, the evolving economics of real estate could redefine buying strategies and lead to significant transformations in the market.