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Heading Into 2020, Here Is What Foreign Investors Are Targeting In CRE

China’s retraction from the United States commercial real estate market has left a mark — but there are new substitutes waiting in the wings, coming from all corners of the globe.

Meridian Capital Group Senior Executive Managing Director Helen Hwang, Morgan Stanley Executive Director Michael Givner, Hodges Ward Elliott Managing Director Paul Gillen

“Within the last 24 hours I've met with a Chilean group, as well as a German group last night for a closing dinner,” Nuveen Real Estate Global Chief Operating Officer Rahul Idnani said at Bisnow’s New York 2020 Forecast event Wednesday. “It seems to me that the Canadians and the Germans, the Koreans, Singaporeans and select countries in the Middle East are very active in the New York market — as well as the rest of the United States.”

Overall, offshore investment into United States real estate has slowed from the levels seen last year. Foreign buyers dropped some $14.7B on American real estate assets in the first half of this year, compared to $19.8B during the same time period the year before, according to CBRE.

The major foreign investors that have been active in the U.S. market dropped back, Chinese players invested some $3.8B in the first half of this year, which is down 95% from their annual spending over the previous five years.

In their place, players from Bahrain, the UK, the United Arab Emirates and Switzerland all invested significantly more than they have in the past, per CBRE. Meridian Capital Group Senior Executive Managing Director Helen Hwang said she is working with a South American group to acquire U.S. multifamily properties.

And while secondary cities are becoming more attractive, panelists said overseas investors are directing their money in those markets to local fund managers because of the unfamiliar terrain.

“I think they feel very confident in gateway markets to pursue investments on a direct basis, whereas in Denver, Portland, Raleigh, Scottsdale — they look to managers to take them along for that investment because again, it is still a new market," Idnani said.

While that territory might be unfamiliar for foreign buyers, their interest, combined with competition from domestic and institutional players, is driving up prices.

"Right now what we're finding is that surprisingly, you don't see a lot of different cap rate deltas in those markets, Atlanta, Raleigh/Durham, Phoenix, Denver," Hwang said. "The cap rates are not better there. It's actually pretty saturated."

CohnReznick partner Ronald Kaplan, Hidrock Properties CEO Abie Hidary, Nuveen Real Estate Managing Director Rahul Idnani, Meridian Capital Group Senior Managing Director Helen Hwang, Morgan Stanley Executive Director Michael Givner and Hodges Ward Elliott Managing Director Paul Gillen

Meanwhile, the headline-grabbing deals from foreign buyers still seem to be in the Gateway markets. Earlier this year, for example, German Insurer Allianz SE announced it was paying $384M for a 49% equity interest stake in an office condominium at 30 Hudson Yards.

“Just focusing on the New York office market, it certainly seems like the Germans rediscovered New York this past year,” said Morgan Stanley Executive Director Michael Givner. “I think the impact of negative rates in Europe and elsewhere may bring people back to the states."

Last month, Japan’s Shimizu Realty Development paid $152M for the office building at 305 East 46th St.

Hodges Ward Elliott Managing Director Paul Gillen said he spent a week in Japan in October, meeting with potential investors. Real estate players have been expecting for some time that Japan may start ramping up its United States real estate investments.

"There’s a lot of capital there,” Gillen told Bisnow. “They’ve been really entrenched in their own economy ... and now they are worried about growth slowing, and they have negative yields.”

Gillen added that while Japanese buyers have traditionally sought out assets like Class-A office buildings, they are increasingly — like many investors — looking at multifamily and industrial assets, where they have not been particularly active before.

They might also be learning the lessons of Unizo, which made billion-dollar splashes into the New York and D.C. office markets before retreating, selling multiple buildings at a loss over the past year.

CohnReznick partner Ronald Kaplan, Hidrock Properties CEO Abie Hidary, and Rahul Idnani, then Nuveen Real Estate's managing director, speaking at a Bisnow event in 2019.

Other panelists said Chinese and European investors are still active, just to a lesser degree.

“We recently did a deal with a Chinese firms on a land deal that's going to be a condo development, so that's still happening,” Meridian Capital Group's Hwang said. "We are currently working with several Korean firms who traditionally were in the senior and mezzanine debt space, but are now getting into the equity sector, which is exciting for us."

Hwang earlier this year brokered the $160M sale of 220 East 72nd St. to a partnership that included Dutch pension fund PGGM.

She and other panelists pointed to a shift from these kinds of offshore investors, saying they are increasingly looking further afield.

While international U.S. real estate investing has traditionally focused on trophy assets in major cities, experts have noticed foreign players are now targeting other types of assets in secondary and tertiary markets.

Colliers International President of the Tri-State Region Michael Cohen, MdeAS Architects principal Dan Shannon, Vocon partner Thomas Vecchione and Vornado Realty Trust Senior Vice President Josh Glick

“I would say it's really a function of growth,” Morgan Stanley’s Givner said. "And if you look at New York over the past couple of years, by and large, net effective rents have been flat at best."

“The search for yield means people are moving out on the risk curve," Gillen added.

The growth story is why cities like Denver and Raleigh/Durham are being cited as new targets. Other panelists pointed to a growing problem that may drive population — which capital always follows — to other parts of the country.

“The cost of living in New York and the cost of high-level talent is really going to start becoming a breaking point,” said Tom Vecchione, a partner at architecture and design firm Vocon. “I’m working with employers saying, ‘We’ve got to move 20,000 people to the Midwest.’ The workforce is going to dramatically change because the cost of living is going to dramatically change."