AFIRE survey: NYC ranked #2 among foreign investors

Real Estate Weekly, Jan 22, 2003

Despite the city's financial woes, increasing taxes, and high vacancy rate, New York was named the second-preferred city, after Washington, D.C. for foreign investors' real estate dollars according to the results of a survey released today by the Association of Foreign Investors in Real Estate (AFIRE).

Following New York were Los Angeles, Chicago, and San Francisco. The 11th annual survey was conducted by Kingsley Associates among members of the Association of Foreign Investors in Real Estate (AFIRE) who collectively have more than $226 billion invested globally including $70 billion invested in U.S. real estate.

"New York remains the most dynamic and diverse city in the U.S., despite Wall Street's weak performance" said Albert Behler, president and CEO Paramount Group, Inc. a privately held investment and property management firm headquartered in New York. "The market's faith in the future performance of this city is showing itself through the robust investment market in spite of soft fundamentals. A 12% vacancy at year-end is not at all catastrophic, especially since most other CBDs are averaging a vacancy rate close to 15%," he added.

Behler said that although the large amount of sublease space (about one-third of the 12% vacancy rate mentioned) is a concern, this was offset by the fact that landlords are still collecting rent for these spaces. "Once this cycle corrects itself, the sublease space will quickly be removed from the market as companies expand," he added. "Some of the job losses experienced in the financial sector will be at least partially offset by growth in other business sectors, especially other service industries. And, there is currently very limited speculative office development. Most buildings still under development are substantially or 100% leased."

Foreign investors remain extremely positive about U.S. real estate as a strong investment opportunity, ranking the U.S. in terms of offering: the most stable and secure real estate investment; the best opportunity for capital appreciation; and the best risk-adjusted potential return. Sixty-six percent (66%) percent of respondents indicate that their firm's appetite for U.S. commercial real estate investment is somewhat or much stronger relative to opportunities in other countries.

Respondents intend to increase their volume of U.S. real estate acquisitions in 2003 to an average of $308 million per investor, an increase of 27%. Investors' planned U.S. acquisitions represent 46% of total global real estate acquisition dollars targeted for 2003, compared to a 36% share in 2002. The decline in U.S. real estate's share of global allocations can be explained by several factors," said Robert D. McSween, chairman of AFIRE and senior managing director, LNG Realty Partners. "Seventy-nine percent (79%) of respondents said it was either 'somewhat' or 'very difficult' to find attractive real estate opportunities in the U.S.A today, and 30% said that finding attractive opportunities was the greatest challenge to investing in U.S. real estate today.

"In addition, as the value of investors' portfolios declined over the last two years, due to the dramatic drop in equity prices, a given amount of real estate within a portfolio became a larger percentage of the total," added McSween. "The percentage allocation to real estate actually increased in many cases above the target allocation. This 'denominator' effect has become a curb on new real estate investment for a number of investors."

"Part of the decrease in portfolio allocation to North America may be also be explained by lower asset valuations in 2002 resulting from higher vacancies in existing properties," added James Fetgatter, chief executive of the organization.

"It is very interesting to note that, for the first time in the 11 years of the survey, respondents have expressed interest in four out of five asset classes," added Fetgatter. "The foreign investor is no longer just a buyer of large office buildings."

Although multi-family was ranked as the most attractive property type for investors' dollars in 2002, its attractiveness rating declined by 15%. Office buildings, which ranked as the number one property type for investors' money between 1995 and 2000 and the second in 2001, fell to third position, behind industrial properties. The hotel! leisure category, which has consistently ranked as one of the least attractive property types for investment, earned a 26% higher attractiveness rating in 2002, a greater improvement than any other property type. Retail also showed a significant gain in attractiveness among survey respondents.