Switchover to 2013 Reshaping Foreign Investor Strategies for U.S. CRE

Posted on January 10, 2013

As 2013 approached, offshore investors rejiggered their U.S. commercial real estate holdings with many foreign investors closing out both successful and unsuccessful ventures just as a new batch of funds were emerging to jump in on the ground floor of the U.S. economic recovery.

Several high-dollar property sales transpired in the last few weeks of 2012 and early this year, with investors from The Netherlands, Australia, South Korea and Germany selling U.S. property holdings, and funds from Canada, Bahrain, Israel, Norway and Germany lining up new deals.

The U.S. real estate market was overwhelmingly ranked first in providing opportunities for capital appreciation, according to members of the Association of Foreign Investors in Real Estate (AFIRE).

For the first time since AFIRE began surveying its members in 2001 to rank the top global cities for investment dollars, four of the five cities they selected are in the U.S.: New York, San Francisco, Washington, DC, and Houston. London was the fifth.

“The strong endorsement of both San Francisco and Houston by our members in this year’s survey directly reflects the propensity for real estate investment to follow jobs, in this case, technology and energy, which are thought to be among the top drivers of the next economic wave,” said James A. Fetgatter, chief executive of AFIRE. “As other economic drivers emerge, it will not be surprising to see investors seek opportunities beyond the traditional New York and Washington, D.C. markets.”

In this year’s AFIRE survey, 39% of survey respondents said they have a more optimistic perspective than they did a year ago regarding the U.S. real estate market, and the pessimistic view expressed by 33% of respondents in last year’s survey had all but disappeared.

81% said they plan to increase their portfolio size in the U.S. with 31% planning a “major net increase.” None reported plans to decrease their U.S. portfolios.

71% of respondents also said they agree that improving fundamentals will make secondary markets in the U.S. more desirable in 2013.

“The dominance of U.S. cities among investors’ ‘top global’ choices, with four of the five being in the U.S., evidences the U.S. as the most transparent, professional, and liquid real estate market in the world,” said Christoph A. Kahl, the chairman of Jamestown U.S.-Immobilien GmbH and the newly elected chairman of AFIRE. “Particularly as compared to other countries, population growth in the U.S. will be a major driver for long-term capital appreciation and is one of the reasons why the institutional investment community worldwide favors the U.S. for its real estate allocations.”

Overseas-based sellers in the last few weeks have been finding willing buyers in the form of large institutional U.S.-based funds. Here are summaries from some of the most prominent recent transactions:

The Sellers

Dallas-based Lone Star Funds agreed to acquire a portfolio of office properties from Netherlands-based Wereldhave for $720 million. The Dutch investment firm put ist U.S. holdings up for sale to pay down debt and shore up its European operations. Its portfolio includes five properties in Washington, DC, five in Austin, four in Dallas, two in San Diego and one in San Antonio. The transaction is scheduled to be completed during the first quarter of 2013. Wereldhave was advised by Eastdil Secured. During the last quarter of 2012, Wereldhave also sold two plots of land in the U.S., one in Texas and the other in Virginia, for a total of $10 million. According to CoStar research, Wereldhave’s U.S. office portfolio currently has a vacancy rate exceeding 29%.

Australia-based DEXUS Property Group agreed to sell the majority of its U.S. industrial portfolio in two separate transactions for a total consideration of $561 million. The portfolio generated significant interest from a number of institutions and real estate companies, with more than 40 individual parties expressing interest when the sale campaign was launched by Eastdil Secured in September 2012. An entity advised by Chicago-based Heitman LLC will acquire a portfolio of 25 of the properties for $542.8 million. Settlement of this transaction is expected to occur Jan. 31.

The Korean Federation of Community Credit Cooperatives, a pension fund manager based in Seoul, just sold 333 Market St., a 33-story tower on San Francisco’s financial district for $447 million to Wells Real Estate Investment Trust II Inc. In June 2010, Principal Financial Group sold the trophy asset to the South Korean group for $333 million or $507 per square foot. The 657,115-square-foot office building was built in 1979 and has received more than $80 million in capital investments and tenant improvements over the past eight years. Wells Fargo Bank fully leases the property.

New York-based Tishman Speyer re-acquired full ownership of the Chrysler East building at 666 Third Ave. in New York this past November. Tishman Speyer originallly sold 75% of ownership in Chrysler East in 2002 to German institutional investors led by CommerzLeasing & Immobilien AG for $210 million. This go-around Tishman paid $333 million and will likely be looking to re-sign one of the tenants it originally signed. Accounting firm Grant Thornton, which in 1999 signed with Tishman Speyer to occupy 62,648 square feet in the building, has outgrown its space and outlasted the 13-year-old buildout and floor space design. According to a loan analysis in one of the first new CMBS deals of the year (MSBofA 2013-C7), Grant Thornton’s lease expires in November 2014 and it is expected to require 130,000 square feet, much more space than it currently occupies. While Tishman may accommodate the Grant Thornton within the building, the firm is also said to be looking at other buildings in the market.

The new Hines U.S. Office Value Added Venture III fund acquired its first investment, 24th at Camelback I, from Germany-based GLL Real Estate Partners, which has owned the property since 2006. Hines paid $81 million. GLL is an institutional real estate investment advisor based in Munich. Hines originally developed the eight-story 302,209-square-foot property at 24th Street and Camelback Road in Phoenix and has managed the building since inception.

The Buyers

While it has yet to make a purchase in the U.S., Norway has given permission for its giant $665 billion national pension fund to invest in property outside Europe for the first time starting this year. The fund’s manager, Norges Bank Investment Management, said it could target up to $11 billion in the U.S. At the end of the third quarter, the pension fund held less than 1% off its assets in real estate, well below its 5% targeted goal. Norwegian officials predicted it would take years before it would reach the planned level of off shore real estate investments. The fund is forecast to grow to $1.1 trillion by 2020, indicating it could hold $55 billion in real estate by then.

Morguard North American Residential Real Estate Investment Trust based in Mississauga, Ontario in Canada finalized two separate agreements to acquire a total of 6,474 multifamily residential units in the U.S. for $633 million. The first agreement is for the purchase of 12 multifamily residential apartment and townhome complexes comprised of 3,752 units in Dallas, Denver, Tampa, Raleigh and Atlanta. The acquisition is expected March 31, 2013. In addition, the REIT has finalized an agreement to purchase, 12 multifamily residential apartment and townhome complexes comprised of 2,722 units in Pensacola, FL; Mobile, AL: and south-west Louisiana from Morguard Corp. The acquisition is expected to close during the first quarter of 2013.

Bahrain-based Investcorp acquired two portfolios comprised of 16 office properties in the Greater Houston and Chicago metropolitan areas. Investcorp’s real estate unit is based in New York and Investcorp also has co-headquarters in London. The combined 900,000-square-foot portfolio is valued at $120 million. The two acquisitions include 11 properties at the Oak Creek Center in suburban Chicago’s East-West corridor in Lombard, IL, and five properties known as Pin Oak Park in Houston’s West Loop (Bellaire submarket), less than four miles from the Texas Medical Center, the largest medical center in the world. The properties have a combined occupancy rate of 90%, are leased to a diverse roster of tenants, many of whom are involved in the health care industry. Investcorp joined forces with two reputable operating partners for these transactions. In the case of Oak Creek Center, Investcorp partnered with Chicago-based Golub and Co., with whom it has entered into previous transactions. For Pin Oak Park, Investcorp teamed up with Houston-based Griffin Partners.

Investcorp also sold a partial interest in a portfolio consisting of 22 predominantly grocery-anchored shopping centers with properties in Houston, Dallas and San Antonio. The joint venture buyers included the Israeli insurance company The Phoenix and Houston-based Global Fund Investments, which acquired a 49% interest. Global has managed and leased the portfolio since 2007. The portfolio’s occupancy is 92.5%, and it includes 12 high-volume grocery-anchored centers (five Krogers, four H-E-Bs, one Wal-Mart, one Tom Thumb, and one Albertsons). The average sales of the reporting grocers exceeds $540 per square foot. Thirteen of the properties are in Houston (1.5 million square feet), eight are in Dallas (700,000 square feet), and one is in San Antonio (200,000 square feet).

Deka Immobilien of Germany recently acquired 2175 K St. NW, a 137,925-square-foot office building in downtown Washington, DC, for $86.4 million. The 11-story building houses the European Union Delegation to the United States and was originally constructed in 1982. In 2010, it added three floors as part of a comprehensive renovation and expansion. Deka acquired the property in an off-market transaction from a joint venture between a U.S.-based investment manager and a local operator.

Mark Heschmeyer, Costar Group.