COVER STORY, NOVEMBER 2009

FOREIGN CURRENCY
Investors intensify interest in domestic assets.
Jon Ross

Foreign investors have always played a role in the domestic commercial real estate market, buying up the occasional hotel property, office building or other high-performing assets in the Southeast in small quantities. With the advent of the recession and the downward plunge real estate values took late last year, European firms, South American investors and even North American buyers have been more willing to pull the trigger on stateside opportunities.

“The interest in the Southeast generally is much higher than it was before the recession,” says Abe Schear of Atlanta-based law firm Arnall Golden Gregory. “Before the recession, [overseas buyers] generally thought that the United States market was way too expensive.” Earlier this decade, foreign real estate investors busied themselves by pursuing properties in Eastern Europe, Asia and Africa. Now, things have changed. Schear attributes the renewed interest international firms are taking in assets within the United States to the worldwide decline of the dollar. “Generally, the rest of the world, until 2 or 3 years ago, thought that the United States’ pricing on real estate was significantly too high, particularly too expensive as related to other opportunistic investments throughout the world,” he says.

International players come from a broad range of the real estate spectrum, from single investors to family-owned firms to large companies with branches in America. In addition to opportunistic investors looking for good, cheap properties, Wynn Williamson of the property consulting group Aguirre Newman’s office in Madrid, Spain, says the main action comes from funds aimed at acquiring distressed debt. “Many of these opportunity funds are linked with U.S. institutions but managed by funds of international origins,” Williamson wrote in an e-mail. “These buyers are more focused on stable, long-term cash flows and are taking advantage of the outward cap rate movements and the difficult position of many current owners.”

At the same time, the recession has worked to push back some buyers who may have seen opportunities before the domestic real estate sector collapsed but have since backed out of the market. These clients, who mostly fall in the family-owned category, were interested in the United States early last year, but they have since begun looking at real estate holdings throughout Europe.

“After a wave of bad news related to U.S. real estate in late 2008/early 2009, there has been a much decreased interest from our investors,” Williamson said. “Currently, our clients are more focused in London, Paris and Germany, even with the Euro comparatively strong again.” Picking up on this reluctance to invest in the U.S. market, Aguirre Newman has acquired CB Richard Ellis’ Latin America operations. Based in Miami, the office focuses on markets in Mexico, Chile and Brazil.  

But Williamson isn’t ready to write off the United States. The new CB Richard Ellis team will also help secure deals in the Southeast, and Spanish investors are still making plays for stable real estate. Historically, Williamson has helped customers with deals in the $15 to $60 million range. The bulk of the transactions he sees deal with prime office space, residential developments and premium retail in big cities. “Our clients are always interested in Florida, particularly the Miami area,” he said. “We also have clients that have professed in interest in New York, Washington and other ‘24-hour’ East coast cities.”

The Raleigh Hotel in Miami Beach was recently sold to South American investors.

Rob Koger of Molinaro Koger has been seeing a lot of South American interest in Miami hotel properties. Last month, his firm helped a group of South American investors purchase the 104-unit Raleigh Hotel in Miami Beach. The asset also attracted interest from Asian and European investors. For the most part, however, Koger has seen South American investors pursue properties in Florida; Asian parties, he says, tend to invest in assets on the West coast, and Middle Eastern firms like to focus on New York City and Washington, D.C. In any of these places, hotels are hot properties for foreign capital. 

“Hotels offer a good opportunity right now because their cash flows have been depressed because of the recession and because of the market that we’re in,” he says. “Investors can come in and evaluate the cash flow that assets are currently producing and make a valuation based upon these cash flows that are significantly lower than they were at the peak.”

Many of these transactions occur between parties separated by thousands of miles of land and water, so common sense would dictate that these deals may be more difficult to arrange than transactions between two domestic firms. Speaking from experience, Koger says that investors interested in American assets usually have enough knowledge of conducting overseas trades that brokering a deal with foreign parties isn’t much more difficult than a deal across state lines. “These investors are sophisticated; they have a lot of cash and resources at their disposal, and they generally have been investing across various borders for years,” he says. “These investors are attuned to the various challenges in certain markets, whether they’re investing in Mexico or the U.S. or Canada.”

For all the opportunity in the Southeast and the rest of the country, foreign companies are still exercising caution when investing in American real estate. These investors are still taking a long, hard look before making large financial commitments. “They’re not rushing in with wheelbarrows full of cash, but they are looking at select opportunities in certain markets and are bidding on assets in selective cases,” Koger says. “There are some quality assets in the market today, and the competitive landscape is more appealing to foreign capital in so much as there’s not as much competition for assets. They’re able to come in and have time to evaluate deals and make bids and in some cases be successful.”

When the United States economy recovers, Koger is certain overseas investors will maintain a high level of interest in domestic assets. “Even as the economy starts to turn, there’s going to be a continued difficulty in getting financing for commercial real estate,” he says. “That’s going to leave opportunities for investors, especially high net worth investors who are willing to purchase on an all-equity basis.”

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