Foreign investors target US real estate market

Real Estate Weekly, May 17, 1995

Over 40 firms representing eight European countries attended the day-long seminar. Studley also noted that land presented an excellent investment opportunity for the foreign investor as well, but strongly cautioned the conference attendees that "the complexities associated with the purchase of land can be insurmountable, even for the local specialist."

Sounding a very optimistic note, Studley said that "the strength of the U.S. economy is a joy to be observed," adding that productivity is up, banks are healthy once again and manufacturing is undergoing a resurgence. He cited the resurrection of the computer and automobile industries as more evidence of the nation's renewed strength. Furthermore, Studley noted that a very significant, yet hidden asset of the U.S. economy is the fact that managers of American corporations are finally being held accountable for company performance.

"The shareholders' revolt has mandated efficiency throughout corporate America," emphasized Studley. "Several years ago we thought this country had lost its ability to compete in the global marketplace, and now we are the leader."

Studley predicted that there will be continued changes in the U.S. commercial real estate market, including a marked decline in vacancy rates over the next couple of years, at a pace which may surprise many observers. "The addition of 3.5 million jobs to the national payroll has created a pent-up demand for commercial office space. Furthermore, aside from a small number of build-to-suit transactions, there is virtually no new construction underway," said Studley. "Consequently, since new construction requires at least three years from start to finish, there will be no additional supply on the market for quite some time."

Real Estate to Out-Perform Other Assets

A number of major themes emerged during the conference. First, real estate, relative to other assets, presents an excellent investment opportunity, and is likely to out-perform U.S. stocks and bonds for the second year in a row. Second, office buildings, rather than other product types - retail, residential and hotel - may, in fact, offer the best return to the foreign investor. Furthermore, suburban markets may be even "hotter" investment opportunities than the CBD's. However, there are certainly some opportunities in growing residential markets in the southeast and southwest, as well as in specific retail sub-sectors such as well-managed community centers.

For example, Robert McCormack, executive vice president of Citibank, N.A., compared investment opportunities among the various market sectors, and noted that office building fundamentals are improving rapidly, including expected cash flows, with some particularly profitable opportunities in the southeast and southwest. "Vacancy rates are in the 14 to 15 percent range in most markets, and are expected to fall to the single digits in the next three to five years," said McCormack. "Perhaps even more significant is the fact that suburban vacancies are lower than the urban markets for he first time ever." Furthermore, McCormack predicted the economy's future "boom and bust" cycles will be shallower than what we recently experienced, and said "This bodes well for the long-term investment philosophy, a perspective which is characteristic of many European investors."

Responses to an annual membership survey distributed by the Association of Foreign Investors in U.S. Real Estate (AFIRE) support the notion that the U.S. real estate market is now providing more attractive immediate and long-term yields to international investors than investment opportunities in their domestic markets. Of the respondees, 83 percent believe that the U.S. is a better place to invest this year than last, and 43 percent have definite investment plans and goals. James Fetgatter, chief executive of AFIRE, also noted that AFIRE's "Top Cities for Foreign Investment" ranks Atlanta and Washington, D.C. as number one and two, followed by New York, Phoenix and Charlotte.

Fetgatter recently conducted an informal survey of 12 foreign investors. "The results were quite encouraging," he said. "The respondents indicated that, as a group, they plan to invest between $2 billion and $3 billion in U.S. real estate in 1995."

New York and Washington, D.C. Offer Prime Opportunities

Supporting Fetgatter's findings, a panel of experts representing Studley's national network of offices, concluded that Midtown Manhattan and Washington, D.C. offered prime opportunities for international investors. Randy Kohana of New York's Midtown office said, "Construction has been at a virtual standstill, and no new starts are anticipated for the next three to five years. This, coupled with steady leasing activity, portends a near-term increase in property values."

Likewise, John Kyle of the firm's Washington, D.C. office offers, "Sales prices for existing buildings are finally reaching replacement costs, and trophy properties are achieving close to peak prices."

Two of the seminar's afternoon panelists, David Jacob, managing director, Nomura Securities, and Barden Gale, director, Salomon Brothers Inc, personified another phenomenon of the recently recovered real estate market - namely, that a new breed of professional, including investment bankers and other financial experts, has taken an active role in real estate. Both Jacob and Gale discussed the innovations the financial community have brought to the real estate investment arena.