Individual investors, sovereign wealth funds, private equity funds, insurance companies, pension funds, and a host of other foreign investors have one thing in common. They all want to own commercial real estate in the United States.
These investors are spending time attending seminars, contacting investment sales and accounting and legal professionals to understand the complications, opportunities and pitfalls of foreign ownership. In September, many of the members of the Association of Foreign Investors in Real Estate, which represents the interests of nearly 200 investing organization, an organization which represents the interests of nearly 200 investing organizations from 21 different countries for the 24th annual membership meeting. October 25 -26th is the date for the AFIRE Outreach conference in Beijing, China, entitled "Investing in U.S. Real Estate-What you need to know? This conference in association with the Real Estate Law School of Peking, will concentrate on educating Chinese institutions and investors on U.S. real estate and the U.S. market.
"The U.S. still offers the most stable and secure options for foreign commercial real estate investors" according to AFIRE 20th survey conducted among AFIRE members in the 4th quarter of 2011.
Major points of the survey indicated that:
- Sixty percent of the survey respondents said they plan to grow their investment in U.S. down from 72% last year.
- The U.S. provides the best opportunity for capital appreciation, with 42.2% of the vote.
"Foreign real estate investors have made it clear there is considerable pent-up demand for U.S. awaiting better real estate fundamentals and relief from the Foreign Investment in Real Estate Property Tax (FIRPTA) Regulation", said James Fetgattel CEO AFIRE. "If the investing environment improves, the U.S. is poised to return to its safe haven status".
AFIRE reported that the top U.S. cities for foreign investment in the 20th survey were:
1 New York City
2 Washington, D.C.
3 San Francisco
5 Los Angeles
In July, Jones Lang LaSalle reported that global investor purchasing activity picked up in the second quarter of 2012 with total market volumes increasing 24 percent over the first quarter of 2012 to $108 billion, according to date collected from ore than 60 countries by JLL Capital Markets Research for the firm's second quarter 2012 Global Capital Flows Report.
The second quarter 2012 global investment volume increased 24% from the previous quarter to $108 billion, with the Americas as the outperformer, growing 33%.
Other highlights include:
- London remains the world's most sought after location
- Top 10 global investment markets accounted for 42% ($82.5 billion) of all global investment volume; London led active global investment markets, followed by Tokyo and New York City through the first half of 2012.
- Full year 2012 global forecast remains at US at $400 billion and 108bn for Europe
Highlights on the U.S. investment and capital markets:
- The United State moved back towards the $40 billion transactions mark in the second quarter, with around 35 percent of deals involving cross border parties
- U.S. Investment sales volume in total for all product types increased in the second quarter of 2012 to $54 billion, up 30% form the previous quarter.
- Estimated 2012 sales volume expected to climb just under 10% higher than 2011 as growth slows, but secondary and tertiary markets become more active.
- Core Class A office and multifamily assets in primary markets remain sought out by investors.
- REITs and unlisted funds were the second quarters biggest net buyers of property
While New York, San Francisco and Washington, D.C. have long topped the target list for foreign investors, a number of secondary cities have now entered Top Ten list for cross border purchases into the United States, including Miami, Minneapolis and Phoenix.
"Core U.S. Real estate throughout primary and many secondary cities remained very attractive to both domestic and foreign investors, based on absolute initial yields on offer, and the spread over record low Treasury rates," said Josh Gelormini, VP Americas Research JLL. "The U.S. is also benefitting from a safe haven strategy, as other global markets appear on shakier ground, particularly given the ongoing Euro zone crisis."
The Top Ten Cross Border purchases during the second quarter of 2012
Ranking U.S. Market U.S. Millions
1 New York $1,014
2 San Francisco $ 685
3 Washington, D.C. $ 643
4 Miami $ 554
5 Chicago $ 529
6 Dallas $ 514
7 Seattle $ 431
8 Minneapolis $ 384
9 Boston $ 318
10 Phoenix $ 317
Even though foreign investors are bullish on investment, investment sales may not reach the levels of 2011. In a report issued by Real Capital Analytics and the New York Capital Markets Group of Jones Lang LaSalle reported that total investment markets for the top markets (for properties $10 million and greater) the total sales for the first half of the year amounted to $57 billion as compared to $152 billion for the entire 2011.
Top Investment Markets
Transaction Volume in U.S. billions (Properties $10 million and greater)
Year ended 12/31/2011
Ranking City Volume
1 NYC Metro $34
2 London Metro $29
3 Tokyo $23
4 DC Metro $17
5 Paris $11
6 LA Metro $10
7 SF Metro $9
8 Kong Hong $8
9 Singapore $7
10 Chicago $5
First half of 2012-08-23
Ranking City Volume
1 London Metro $12
2 Tokyo $13
3 NYC Metro $13
4 Hong Kong $8
5 SF Metro $2
6 Paris $2
7 LA Metro $2
8 DC Metro $1
9 Chicago $1
10 Toronto $1
Investors continue to remain bullish on New York City. The investment sales market continued to achieve near peak pricing in the second quarter. Transaction volume has slowed versus the first half of 2011. A total of 30 major transactions over $100 million closed in the first half of 2012, compared to 33 transactions in the prior year's period.
Sales volume for closed transactions (over $10 million) through the second quarter of 2012 totaled $9.4 billion, 29.3% below total volume over the same period last year. Pricing has returned to near peak levels for quality commercial and residential properties with increased competition as interest rates remain low and New York market fundamental continue to outperform the market.
Robert Knakal, chairman, Massey Knakal Realty Services reported this summer that the New York City Investment Sales Market over the last three for four weeks have been nearly reminiscent of the market in 2007, this is the best market we have seen in 5 years.
"The institutional capital which inflated the asset bubble in the 2005-2007 period had been on the sidelines for a couple of years, but has now reemerged, in some cases stronger than before, and is actively competing with the high net worth individuals and established New York families that have been extremely active since the downturn."
"These investors are being joined by foreign investors that are coming to the market in numbers unseen in the 28 years that I have been brokering properties in the city. We expect direct investment from foreign investors to approximately double the long term trend line and including indirect foreign investment (mostly in the form of equity financing) foreign capital should account for over 40 percent of the total investment sales activity this year".
Two of the most active foreign investors are our neighbors from Canada and the State of Israel. Last year, in a study commission by Israel publication Globes, found that Israelis invested $1.15 billion in US income producing properties for the period from July 2010 to June 2011. The Bregman Baraz Real Estate survey found that Israelis were the second largest foreign buyers of US income producing real estate, after Canadians.
Foreign investment accounted for 7.5% of total investment in the U.S. income producing real estate in this period, investing $1.15 billion to buy 36 income producing properties in the US, after $4.22 billion invested by Canadians, and ahead of the $1.14 billion invested by the Swiss. Total foreign investment was $12.15 billion.
Foreign investment in the US rose by 33% in the first half over the corresponding half. Within the body of the article, Globes reported that Tel Aviv Stock Exchange company Harel Insurance Investments and Financial Services real estate manager Gadi Ben-Haim said, "There is no doubt that it's better to buy in Manhattan than in remote locations, but the current 4% return there is illogical and much lower than a year ago, although there are still opportunities. We bought property in Boston because it's a larger metropolis of six million people. We try to focus on key markets because they are less risky. We won't go to tier 3 towns of 300,000 residents, but to locations with liquid properties."
In August, Harel Insurance Investment and Financial Services entered into a joint venture with SL Green Realty Corp to build a second student dormitory resident for Pace University at 33 Beekman Street in downtown Manhattan. This new building follows construction by partnership for the 609 bed dormitory for Pace which the joint venture began construction in 2011 at 180 Broadway.
Also in August, Marc Schimmel, a director of Israeli company Koor Industries and WeWork, chief executive officer Adam Neumann assumed minority interests in the ownership of the top 30 floors of the Woolworth Building. According to the trade Schimmel and Neumann acquired the rights to purchase the top part of the landmark building, then transferred a majority of their position to Alchemy and its institutional partner. In 2009, Marc Schimmel and his brother Jacob, the owners of Ganden Holdings, the holding company which controls the IDB group of Companies received the rights to own 12% share in the capital gains in the purchase of the former HSBC Building at 452 Fifth Avenue. In October, 2009, the tower was sold to a joint venture between Israeli companies Koor Industries and Property and Building Corp, both units of Israeli billionaire Nochi Danker's IDB Holding Corp.
Canadian investors which include REITs, Insurance Companies, pension funds, private equity and individual's investors ranked number one in purchasing commercial real estate in the United States. In March, the Real Estate Board of New York awarded the Edward S. Gordon Award to CBRE colleagues Darcy Stacom, William Shanahan and Paul Gillen for the sale of 2 Gotham Center, the 670,000 square foot office building in Long Island City. The building was purchased by H & R, a Canadian Real Estate Investment Trust, which sold for $415.5 million, the highest price ever paid for commercial property in Long Island City and the third largest sale of 2011.
In December, Canadian based Manulife Financial Corp; real estate division purchased the 30 story, 748,000 square foot, class A office building Exchange Place Centre in Jersey City for $285 million. At the same time the insurer purchased the Seaview Corporate Center, a four building complex in San Diego.
The Chinese investors who will be attending the AFIRE symposium on investment opportunities in the United States will probably gain insight on the purchases made last year by HNA Property Holdings, the real estate arm of China's HNA Group. In June, 2011, the company, which owns China's fourth largest airline, paid $265 million for a 90 percent interest in the office building at 1180 Sixth Avenue. Earlier this year, the company purchased the Cassa Hotel & Residences at 70 West 45th Street.
These and other foreign investors are in competition with domestic investors to own commercial property in the United States. Looks like I have to concur with my friend Robert Knakal when he says, "Cap rates are compressing sharply, values are up, bidding wars at or above the asking price are commonplace as buyers are climbing all over each other to purchase the relatively few properties are that available for sale."