Real Estate Forum - January 2009

and I don’t read more into it than that.”

Chatter about a potential Zell takeover began when his outfit made the initial investment. There was also talk last year about a possible sale to Prince Al Waleed’s Kingdom Hotel Investments. “There has been a lot of speculation swirling around the stock,” Petrick adds. “It’s a matter of Sam dollar-cost averaging. If you like the stock at $50, you have to love it at $18.”—Maria Wood

Foreign Investors Likely
To Invest More in 2009

A new survey by Washington, DC-based Association of Foreign Investors in Real Estate, or AFIRE, finds that foreign-based investors will be putting more money in US commercial real estate this year than they did last year—a welcome bit of news in what has been a ghastly investment sales environment over the past six months.

Foreign investors say they plan to increase lending by 54% globally and by 58% in the US, according to the 17th annual survey of the association. Also, equity investors plan to increase investment activity by 40% globally and by 73% in the US.

Washington, DC is now the top global city for foreign investors, respondents say, deposing New York City, which came in second this year, followed by London, Tokyo and Shanghai. Half of the investors’ top 10 global cities were in the US; last year five of the top choices were in Asia.

Many respondents forecast that by midyear, the economy and markets will be at a place where overseas investors can start seriously thinking of coming back to the market. While the survey results are heartening, there are qualifiers that have to be factored, say a number of experts.

“The problem is, US real estate markets have gone through such a strong dislocation that it is impossible for local investors, much less foreign-based ones, to work out what the true pricing or value of assets are right now,” says Borja Sierra, executive managing director of Savills US.

Another problem is that foreign investors have much less money to invest and will have to put in much more equity in each deal. The investors that do have money, he continues, namely the sovereign wealth funds, are quite aware that they are one of the few viable players in the market. “Subsequently, they are expecting much greater returns than they have in the past.”

SWFs do not have the same amount of money that they have had in the past, since the price of oil has dropped and, in some cases, they have had to invest in their own countries, Sierra says. Still, he agrees: “There

are more foreign investors out there now kicking the tires, looking at deals and asking the right questions.” Whether that translates into actual transactions remains to be seen, he says.

One tipping point for this group would be more activity by local investors. “Once they start buying, foreigners will follow.” Sierra also says the US market is no longer a premier destination for many foreign funds and firms. “Now a US deal has to compete with deals from around the world, not just other US deals,” he explains.

Not everyone agrees that the US is now on par with, say, China or Russia. “The US real estate market is one that has proven to be resilient through many cycles,” says Matt Bear, principal with the Venture Development Group in Las Vegas. “While we led the world real estate market into this ‘mess,’ we will lead it out of it as well.” Foreign investment will play a part in the recovery because those investors are looking for long-term appreciation and a hedge against currency volatility, he predicts.

Nor does everyone agree that Washington is the top destination spot. “We are seeing quite a bit of activity coming out of Europe— especially from German investors—over the last month,” says Edward Mermelstein, real estate attorney and founder of Edward A. Mermelstein & Associates in New York. They are interested in high-end markets such as New York City, which have fallen enough to provide good opportunity, he says.

Patrick Dussol, transactional real estate partner at New York City-based law firm Herrick, Feinstein, believes that the Obama Administration will try to maintain a weakened dollar specifically to spur foreign investment in the US, and exchange rates favorable to foreigners will have that effect, he says. “Of course, it’s all contingent on lenders opening the windows a bit and financing projects, but I think that market forces will take care of that.”

The executive acknowledges that if the dollar continues to get stronger relative to foreign currencies, overseas investors would be less likely to invest here. And if lenders continue to hoard money, that, too, will put a brake on investment in US real estate.

“I’m not saying that we’ve arrived at the end of the doldrums, but I sense that opportunistic investors are eager to put their money in high-quality property in first-tier markets,” Dussol says. “And if the exchange rates and the lenders cooperate, we’ll see an overall increase in foreign investment in many real estate asset classes here. European, Middle Eastern and Asian money will be at the forefront, but foreign money in general will view US real estate assets the way I view them: as a relatively safe haven for global investors.”—Erika Morphy, GlobeSt.com

After Years of Growth,
Boom Over for Industry

After several years of spectacular growth, the boom is now over for commercial real estate worldwide, according to the 23rd annual Global Market Report published by NAI Global. What began in the US has spread to most other parts of the world, as evidenced by declining rents and rising vacancy rates in most property sectors in many major markets across the globe, a movement that started in the second half of ’08.

“What was globally envisioned in the summer of 2007 as a brief adjustment across the market has now become a massive restructuring with new development projects being placed on hold, property owners looking for new opportunities with existing inventory, sales and rental rate declines in nearly all sectors and vacancy rates that are setting records in some markets,” says Peter Linneman, NAI Global’s chief economist and principal at Linneman Associates. “The next 12 to 18 months will redefine industry practices for the coming decade.”

There were some pockets of growth, however. Although China’s GDP expansion of

9% in the third quarter was less than expected, it outpaced other parts of the world that are experiencing negative growth. Buoyed by new raw material discoveries and a rise in manufacturing,

Latin America bucked the global recessionary trend as well.

In the US, the CBD

LINNEMAN:

office market showed

“The next 12 to

a measure of strength,

18 months will

attributable mainly to

redefine industry

tight supply. Average

practices for the

effective rental rates

coming decade.”

for downtown class A space rose 13% to

$47.31 a square foot in 2008, while the sector’s vacancy level grew 7% to 10.3%.

In the suburbs, class A effective rents climbed slightly by 2% to reach $26.32 per square foot. The amount of vacant space increased only marginally to 13%. NAI Global predicts suburban markets will see a rise in vacancies this year as new product is delivered at a time of weak demand and cutbacks by financial firms spread from the CBDs to the suburbs. Longer term, the office market is poised for strong growth due to a severe drop in development. According to NAI Global, there was a nearly 30% decline in new construction for commercial and office buildings during 2008.