How Foreign Lending Is Affecting Commercial Real Estate

Posted by Kris Lindahl on Thursday, December 6th, 2018 at 3:56pm.

Why Changes in Foreign Lending May Drive Profits for Commercial PropertyForeign lending has always had an impact on commercial real estate, whether its effects are obvious or not. If a foreign bank can give a US corporations their dream rates, they're more likely to buy more property. If foreign banks make it easy to do business with US companies regardless of where they set up their branches, US corporations may choose to start moving more of their business overseas.

But there are a few ways in which this is beginning to change. As the world stage continues to shift at a rapid pace, the market has been busy responding to the turmoil. See how multinational corporations and small businesses alike can prepare for the trickle-down effects of changes in foreign lending.

The BEAT Tax

There has been a lot of speculation about how the latest tax cuts will affect the actions and approvals of the big banks all around the world. With the cuts already costing big billions of dollars due to the reduced value of accumulated tax credits, the profits for the larger banks have been squeezed over the past few months. The larger banks may need to start reigning in their money, lending less and less to companies who want to expand their business. With the cuts already costing big billions of dollars due to the reduced value of accumulated tax credits, the profits for the larger banks have been squeezed over the past few months. Multinational corporations and small businesses alike should be prepared for the trickle-down effects of the changes in foreign lending.

The base erosion and anti-abuse tax is a tax on the payments between a US corporation and its foreign branches and affiliates. The tax is attempting to keep profits and jobs within the country rather than incentivizing corporations to maximize their profit margins through outsourcing. Because foreign banks have been so crucial in facilitating payments between different parts of the company, this could also potentially cut into a foreign corporation's revenue over time.

Officials are still solving the question of exactly how these new regulations will be enforced. Many financial experts think that despite the BEAT tax, banks will still be protected from the worst of its effects. However, the new economic climate could still lead banks to be more cautious about their lending practices. They may need to hike up interest rates or increase penalties to safeguard themselves from a potential drop in demand or increase in regulatory fees.

New Demand at Home

If banks are less willing to work with US corporations overseas and corporations are being taxed for it anyway, the US may start seeing a surge in demand for commercial real estate. The more benefits for companies to stay here, the more space they're going to need as they expand. This could be what's behind the modest rise in deal volume in the first half of 2018. More investors are showing serious interest in commercial property compared to the last two years.

And experts expect it to keep climbing. In fact, some experts think that we're going to get close to the top of the market in the final half of 2018. Unsurprisingly, the prices of commercial real estate have also begun to rise. According to the Real Capital Analytics' Commercial Property Price Indices, average pricing rose 6% in industrial and office assets. And while there's been some sense of pushback amongst commercial property investors in terms of how much they're willing to pay, the increases are solid (especially when taking into account the previous years).

Foreign Lending in Minnesota

Because Minnesota is home to so many major corporations, understanding foreign lending can be helpful when trying to understand the larger economy. As Brexit terms are hammered out, UK companies may find it increasingly difficult to do business in the EU. As of yet, there hasn't been a huge drop in foreign lending (at least not enough to result in any drastic changes). But it will take time for the shifts to make themselves apparent in the larger scheme of thing.

Ultimately, if foreign investors can't get the funds they need at the terms they want, it could open up opportunities for US companies to start claiming more property. We already seem to be seeing the results of this with property appreciation in both the primary, secondary, and tertiary markets. In fact, the latter two categories are seeing more interest than the former one. It shows that companies are turning away from the big cities, like NYC and LA, to cities that have the infrastructure and the workforce without the high price tag. The greater Minneapolis would certainly fit this definition.

The future of commercial real estate in the US is bright, especially for cities outside the primary markets. The impact of tax cuts and changes in foreign lending may be pushing more investors to pay more for property here rather than trying to save their budget by moving overseas. If trends continue to hold, the rest of the 2018 and the beginning of 2019 should continue to see these predictions come to fruition.

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