By Joe Bousquin
In 2005, the Hakimian Organization, a diversified developer based in New York City, bought an 11-story, 550,000-square-foot building on 11th Avenue in Manhattan. Built in 1913 and originally occupied by the Auerbach Chocolate Factory, the site needed an overhaul to be sold as high-end residential. But as market conditions changed and the demand for condos slumped, Hakimian started to re-conceive the deal as office space. In early 2008, they landed a trophy tenant, advertising firm Ogilvy & Mather, which wanted to lease the entire building as its new worldwide headquarters. The firm even had an endearing nickname for its new digs—the Candy Factory.
Washing Ashore
There was one problem. Hakimian would have to secure more than $200 million to redevelop the site in one of the most challenging markets in half a century. Even with a signed lease, most lenders only wanted to nibble at the deal. Th e Singer & Bassuk Organization, the New York brokerage firm that shopped the project, was getting offers from domestic banks for just $35 million to $50 million each. That raised the mind-numbing possibility of having to deal with four or five different lenders to make the project work.
“There was a real differentiation in the size of loan that the domestic lenders would take on, as opposed to the foreign groups,” says Scott Singer, executive vice president at Singer & Bassuk. “That was a big issue because on a deal like that, the fewer cooks in the kitchen, the better. Nobody wants to go in front of four committees to get a decision.”
In the end, two German banks—BayernLB and Deutsche Postbank subsidiary PB Capital—each put $100 million into the deal. Now, the Candy Factory will be completed in early 2009, with Ogilvy set to move in by spring. “It was a great loan that the foreign banks took away from the domestic market,” Singer says. “Foreign banks view the American commercial real estate market as a good place to invest.”
Indeed, as U.S. developers struggle to close deals with domestic lenders, who lapsed into paralysis after the unprecedented government bailouts of September and October, foreign money has continued
to wash onto American shores, looking for a place to go to work.
STABLE GROUND
While the trend can be attributed, in part, to the relative weakness of the dollar, many players say that’s only half of the story. International investors often bet against changes in currency, no matter what side of a trade they’re on. “No one in their right mind would do a property deal simply because the dollar is low,” says Borja Sierra, executive management director for Savills US, a branch of the London-based real estate services firm. “They look at the fundamentals, and if the dollar helps, that’s nice. But serious investors hedge against foreign currencies, no matter how low they seem to be.”
What’s really attracting foreign money right now is the country’s relative stability. Even after the government takeover of Fannie Mae and Freddie Mac in September, the U.S. financial system kept working, and stocks continued to trade on the New York Stock Exchange. Compare that to Russia, whose market was shuttered following Moscow’s attack on Georgia.
“Say what you want about the United States, but this country is a safe haven for capital,” says Sandy Presant, chairman of the national real estate practice at law firm DLA Piper. “It’s stable; it’s the biggest economy in the world. Th e real estate trouble is cyclical—everybody knows it.”
In other words, foreign investors like to bring their money to the United States because, ultimately, they know they’ll be able to get it back out. “Yields around the world have flattened, so investors are not getting the premiums in emerging countries that they should for the risk they’re taking,” says James Fetgatter, chief executive of the Association of Foreign Investors in Real Estate, a Washington, D.C.-based trade group. “People going into Russia and Eastern Europe right now are dealing with 7 percent yields, and you can get 7 percent yields right now in the U.S. So why wouldn’t you invest here?”
LAND GRAB
The short answer is, foreign investors are. According to New York City-based real estate research firm Real Capital Analytics, foreigners dumped more than $51 billion into all facets of U.S. real estate in 2007, doubling their investment from 2006. And while strict development numbers are hard to gauge, since 2005, foreigners have bought $11.4 billion in raw U.S. land. Those dollars have overwhelmingly been flowing out of the money-flooded Middle East, which represented 72 percent of that cash. [See “Foreign Favors,”]
Source: Real Capital Analytics
“Foreign investors have been very active, no doubt about it,” says Dan Fasulo, managing director of research at Real Capital Analytics. “They like residential condominiums, high-end office in Manhattan, and casinos and resorts in South Florida and Las Vegas. That’s [their] niche.” Others say foreign money is waiting in the wings. “Foreign investors are quite savvy—nobody wants to catch a falling knife,” Presant says. “There has to be a replacement for the U.S. banks, and as deals have gotten sweeter and sweeter, off shore money has begun to come in.”
Consider a $30 million deal that closed recently in California, where Asian investors bought the outstanding note on a planned mixed-use tract with the intent of immediately foreclosing on it to take title. “It was a domestic seller in a position of desperation—they needed cash for their own survival,” says Barry Gross, founder of Developers Research, an Irvine, Calif.- based advisory firm that worked on the deal. The kicker? Gross says the land is easily worth $150 million—before any of the 2,000 residential lots get developed. While the dollar’s weakness contributed, it was really the fundamentals that motivated the buyers to pull the trigger.
“They felt that real estate in the United States was very cheap again on a relative long-term performance basis,” Gross says. “They thought it was a good investment.”
OFFSHORE OPPORTUNITY
All this means opportunity for U.S. developers. For instance, in the Korea Town enclave of Los Angeles, Paul Salazar, managing director of locally based Figueroa Capital Group, says Korean money has come in to do condo deals. Instead of creating joint ventures with local firms, these investors, doing deals of up to $50 million, are happy to pay you to do your job, though they don’t want to split profits with you. “They’ll pay through the nose and hire the best and brightest,” Salazar says. “They’ll outsource everything, but they don’t want to give up ownership.”
Investors with more money to put to work will give you a hard look before they commit. “They want to know who they’re in bed with,” says Jack Kessler, a real estate attorney with Pittsburgh-based Buchanan Ingersoll & Rooney. “They’ll do as much due diligence on their partners and past deals as they will on the dirt itself.”
They’ll also look for high-profile sites. “They’re interested in the blue-chip projects, primarily on the coasts,” Presant says. If you can get into a deal with foreign money—whether through an advisor here
or by attending investment conferences abroad—don’t be surprised if it doesn’t move at the speed of domestic money. “[Foreign investors] want some time to establish the relationship, and they are fairly cautious,” Fetgatter says. “We can get impatient as Americans.”
The upside, though, is foreign investors are typically more patient when it comes to returns. “They will give you time to get your project up and running [and] start generating that return before they take their share,” Kessler says.
That’s certainly the case at Philadelphia- based Campus Apartments, which owns and manages 17,000-plus beds and recently inked a $1.1 billion joint venture with GIC Real Estate, a sovereign-wealth fund in Singapore. CEO David Adelman says several investors were interested in financing his firm, but GIC stood out because of its down-the-road perspective. “They had a long-term horizon,” Adelman says. “They wanted to help us build our platform. They weren’t just in-and-out guys like the opportunity funds.”
Still, as foreign investors continue to see opportunity here, the flow of money into America isn’t likely to stop soon. “There’s a lot of foreign money that’s still sitting on the sidelines, and the money is effectively burning a hole in their pockets,” Presant says. “Now, the U.S. is on sale. They’ve got to put the money to work.”
