Foreign Investment Tide Shifts
As Asian investors continue to divest of U.S. real estate, Canadian and European interests quietly have increased their U.S. holdings, gradually offsetting the sharp decline in Asian investment. According to the Labor Department’s Bureau of Economic Analysis, direct foreign investment in 1997, the latest figures available, totaled $34.1 billion, slightly off the 1990 peak of $34.9 billion.
From 1985 to 1990 the Japanese aggressively purchased trophy hotel properties nationwide and top-tier office buildings located primarily in Los Angeles and to a lesser degree New York, Boston, and Washington, D.C. Even at record prices, Japanese investors considered U.S. real estate a relative bargain during this period compared to the cost of Japanese office buildings and hotels.
A robust Japanese economy coupled with perceived bargain pricing drove Japanese investment through the late 1980s. However, recession and overbuilding in the early 1990s sent the U.S. commercial real estate market into a tailspin. With valuations plummeting below the outstanding mortgage balances, many owners were unable to refinance projects. Many Japanese investors were forced to exit the U.S. market, and the value of Japanese direct investment fell from $15.2 billion in 1990 to $9.5 billion in 1991.
The Japanese debacle spawned a second wave of Asian investment that ran from 1993 through 1996. Investors from Hong Kong, Indonesia, South Korea, Singapore, and Taiwan became active in the U.S. market, purchasing trophy hotel and office projects at the bottom of the market cycle — sometimes at half the previous price. Unlike the Japanese investors who intended to be long-term holders, these Asian investors had a shorter-term investment horizon. Many were conglomerates with wide-ranging investment interests.
But since 1997, the Japanese recession has created turmoil in the economies of other Pacific Rim nations, resulting in a dramatic devaluation of many Asian currencies. Consequently, Asian investors are under increasing pressure to liquidate U.S. properties in order to shore up the holding companies’ financial condition. Investors that purchased properties from 1993 to 1994 and sold them after 1996 generally have done very well due to the rapid escalation in commercial property values since 1993. In the last year, Japanese firms that purchased properties in the 1980s and survived the early 1990s crisis have sold properties at 80 percent to 100 percent of original purchase prices. These long-term Japanese investors have been selling properties in order to capitalize domestic operations.
Another reason behind the sell-off of Asian-owned U.S. properties has been the rapid decline in the value of Pacific Rim real estate. A significant oversupply of office space was not absorbed due to sagging economies. Opportunistic Asian investors that have sold U.S. properties for a tidy profit now are reinvesting these profits into Asian commercial real estate at bargain prices.
Serving as a counterbalance to decreased Japanese U.S. investment has been increased investment from Germany, Canada, the Netherlands, Switzerland, Sweden, and the Caribbean Islands. Investment in U.S. commercial real estate from these nations increased from $9.9 billion in 1995 to $16.4 billion in 1997, a 66 percent increase. The strength of the U.S. economy, very strong commercial real estate market conditions, and pricing more attractive than European real estate have made U.S. commercial real estate a strong long-term investment.
As the recent Asian sell-off indicates, the domestic market conditions of foreign investors can play a pivotal role in their U.S. real estate investments. Thus, anyone courting foreign investors should carefully plan entrance and exit strategies based on the investor’s ability to withstand domestic economic turmoil.