At the end of 2024 and into the beginning of 2025, it was hard to get real estate investors to talk about anything other than the U.S.
Tax cuts were set to supercharge the economy, the “Magnificent Seven” were fueling huge stock market growth, and the country was leading the artificial intelligence race. All that growth was primed to boost demand for real estate, and “U.S. exceptionalism” was the phrase on investors’ lips.
Those days are gone.
“I think now it’s exceptional in the wrong way, which is just huge policy uncertainty and stagflation at best,” CBRE Investment Management Chief Economist and Head of Insights and Intelligence Sabina Reeves said.
The U.S. remains the biggest and deepest real estate market in the world, and foreign investors are not about to abandon it en masse.
But recent foreign and economic policy has raised the prospect of a U.S. recession and curbed expectations for rate cuts. A potential tax rise for overseas investors buried in the One Big Beautiful Bill has global investors worried about facing a sudden levy on their U.S. holdings.
Meanwhile, Europe is cutting interest rates, and U.S. foreign policy toward the continent has the potential to boost government spending, with positive knock-on effects for the economy. That is increasing the appeal to real estate investors.
As recently as the first quarter, U.S. real estate investment was growing while the rest of the world suffered. Investment in the U.S. was $77B, up 14% on the equivalent period in 2024, data from MSCI showed. The only other major economies to see investment growth were Germany and Australia, while investment in Europe, the Middle East and Africa dropped 14%, and investment in Asia Pacific fell 18%.
But the new U.S. government’s tariff and foreign policy changed expectations for the economy — and attitudes to the country from foreign investors. U.S. GDP shrank by 0.2% in Q1, and Goldman Sachs has slashed growth expectations for the year from 2.4% to 1.7%.
Worries are rising that tariffs will weaken the economy, increase inflation and bring near-term interest rate hikes. Longer-term bond rates have gone up over fears that spending pledges in the flagship One Big Beautiful Bill will significantly increase government debt.
The combination of factors is giving global investors pause.
“You want to have a very stable environment, and then you can predict the availability of capital, both domestic and international,” BEI Group CEO Collin Lau said. “You don’t want to be explaining to your investment committee that maybe the source of capital coming from outside is uncertain.”
On top of this, though leasing levels held up well in most major sectors in the U.S., investors took losses on assets like offices over the past few years. Investment markets were stagnant even before the recent uncertainty.
Courtesy of CBRE Investment Management
Sabina Reeves
“U.S. real estate continues to get worse, and there’s still no distributions [from fund managers to their investors],” Patron Capital Managing Director Keith Breslauer said. “The delinquencies are higher, mainly because they borrowed more money versus Europe. Secondly, there’s a perception — we could debate it — that the supply in the U.S. is much higher relative to demand than the European supply and demand imbalances.”
CBRE IM’s Reeves said values fell faster in the UK and Europe than in the U.S., increasing their appeal to investors. That is a marked difference to the last real estate downturn, when banks foreclosing and selling problem loans meant the American market found a floor and started recovering more quickly than other geographies.
“The question you ask yourself is, ‘Have they got the right repricing from interest rates rising, and what if there’s a second leg down,’” Reeves said.
Investors also took fright last week at a provision in the One Big Beautiful Bill. Titled “Sec. 899. Enforcement Of Remedies Against Unfair Foreign Taxes,” it outlines that if the U.S. feels a country has imposed unfair taxes against its companies, investors from that country must pay extra tax on dividends and income from U.S. assets.
The extra tax would start at 5% a year, increasing each year to a maximum of 20%. In real estate terms, it would particularly affect core investments where the majority of return comes from income rather than capital growth.
It wouldn’t just apply to direct assets. The tax would be applied to investors in funds as well.
There is no certainty the provision will be enacted, but it is another reason to make investors wary about putting money into the U.S.
“When something like this happens, people ask, ‘Have my returns just changed?’ This can be because of revised forecasts or simply [because] more uncertainty normally equates to a higher return aspiration,” Savills Head of Cross Border Investment Rasheed Hassan said. “So I can still invest, but I need to adjust my return. I can only pay this much if you want me to invest right now.”
Foreign policy is also taking a toll, although its impact on real estate is less direct than economic policy like tariffs. BEI’s Lau said Trump administration moves to potentially reduce the number of foreign student visas the U.S. issues could hit the student accommodation sector.
An increase in European defence spending could boost the economy.
Patron’s Breslauer said President Donald Trump’s policies and commentary about Canada might make those investors less inclined to park money in the U.S. Canadians are the biggest foreign investors in U.S. commercial real estate year in, year out.
“On top of all that, you’ve got that cultural question, which is, are Canadians pissed off with Trump or not? And therefore, are they mandating themselves to come to Europe more?” Breslauer asked.
Even as America is looking more uncertain, conditions for investing in continental Europe are turning more appealing than they have been in some time.
The European Central Bank has cut interest rates seven times since September 2023, from 4.5% to 2.4% — much to the chagrin of Trump, who has called on Federal Reserve Chair Jerome Powell to follow the same path.
Those lower rates mean investors can now borrow at a lower cost, making it profitable to use debt to buy property. For investors that don’t use debt, it makes real estate more attractive than bonds.
Europe’s economy could get another shot in the arm from increased defence spending in Germany and higher German government spending more generally.
The clear message sent by Trump and Vice President J.D. Vance at the start of the year, that the U.S. will no longer act as a protector to Europe, has prompted the UK and German governments in particular to promise increased defence spending, which could boost economic growth.
“The fiscal expansion that Germany is proposing or planning, which is a trillion euros — €500B of infrastructure, €500B defence — if it happens, is absolutely going to power up a large chunk of Europe,” Breslauer said.
Europeans have a lot of capital invested outside of the region. If only a fraction of that capital comes home, it will support and possibly drive up asset prices, Tristan Capital Chief Investment Strategist and Head of Research Simon Martin wrote in a note to clients last week. Martin added that U.S. policies like Section 899 are making it harder for non-U.S. investors to buy assets in the country.
Courtesy of Patron Capital
Patron Capital’s Keith Breslauer
“It is a rare moment when Europe both offers higher potential returns than the U.S. and where the risk is arguably to the upside in Europe and to the downside in the U.S.,” Reeves said.
There is a counterpoint to the idea that global investors will shy away from the U.S. in significant numbers for an extended period.
While returns might look attractive in Europe through one lens, investors must grapple with the fact that despite a currency bloc across much of the continent, it is a collection of small countries, each with its own rules and regulations.
And while U.S. growth is slowing, Patron’s Breslauer said a growing population and business-friendly regulations mean the country is better set up structurally for long-term economic expansion.
Reeves said the U.S. is the deepest, most liquid real estate market in the world, one where any strategy can be fairly easily executed.
“A lot of the secular trends that people are excited about, like data centers or single-family rentals, these niche sectors exist at scale in the U.S.,” she said. “Whereas in Europe, where the same trends exist, you have to develop to own because you’re sort of more at the start of that trend.”
Compared to bond or equity markets, real estate investors are underwriting to hold assets for five or 10 years, not five or 10 days. That means they are willing to look through the current uncertainty, Savills’ Hassan said.
As much as the Trump government appears to be consciously uncoupling from the rest of the world, no country can go it alone. Conditions getting worse for investment in U.S. real estate may make conditions worse in other parts of the world as well, Hassan said.
“If an investor says, ‘OK, we don’t want to do the U.S., we’re going to put all our chips now on Europe or on APAC,’ well, guess what. We’re all interlinked,” Hassan said. “This all matters. All of this is a global trade — you can’t just unravel it in a heartbeat.”