All of a sudden, overseas money appears to be staying there, at least when it comes to commercial real estate.
After several years of strong foreign involvement in Greater Boston’s investment market, industry observers report a sudden chill from such players, especially the German groups which have acquired dozens of buildings locally since the mid-1990s. The drop-off is attributed to a variety of factors, perhaps the most significant of which has been the continued plunge of the euro, the new currency created for the 11-member European Union. Initially valued at $1.17 when it was unveiled in January 1999, the euro last week was trading in the 91 cent range.
Financial markets have been astonished by the speed and depth of the euro’s crash, acknowledged Bradley A. Olsen of Atlantic Partners. The fall has been swifter and deeper than anyone could have imagined.
The impact on overseas groups looking to buy U.S. real estate is that costs are markedly higher than they were before the euro’s introduction, and Olsen – who advises foreign investors on real estate opportunities – said that has had a negative effect on local interest. Until recently, the market appeared to be holding its own, but the past few months have seen a rapid deterioration of foreign activity, Olsen said.
It has been an unbelievable shift of sentiment, he said, estimating that it would effectively cost 25 to 30 percent more for a European investor buying U.S. real estate now versus a year ago. It’s almost as though a curtain has been drawn across the market.
James Fetgatter, chief executive of the Association of Foreign Investment in Real Estate, concurred with that viewpoint. While other reasons exist as well, he said the euro’s difficulties have been the main problem, especially for the syndicated funds that rely on individual investors to fuel property purchases. Among those funds is Jamestown, the entity which last year acquired a 76 percent stake in Boston’s 125 High St. office complex for $375 million.
It does seem to be hitting the retail market the most, Fetgatter said of the syndication operations. They just don’t like any kind of uncertainty.
Alternative investments have also played a role, with Olsen noting that the German stock market has exploded in recent months, especially for the Rhineland’s version of the Nasdaq index. Having tripled in value during the past year, that market has created a new option for individuals to pursue and has siphoned off so much activity that Olsen said the syndication process is significantly more difficult today that it was 18 months ago, and especially over the last six months.
A third factor slowing demand has been the rising U.S. interest rates. With rates expected to increase another 0.5 percent over the near term, that issue will likely not go away, but Fetgatter said sellers could eclipse that trend by lowering their sales prices. Whether that will happen is unclear at this point, however.
CB Richard Ellis/Whittier Partners investment specialist Gary W. Lemire agreed that the Hub has seen a drop-off in German deals, although he also maintained that their involvement has not been as widespread as others have previously indicated. Nonetheless, Lemire said he believes German capital is ebbing, adding that he does not see other countries ready to pick up the slack.
I certainly don’t see the English or the Dutch replacing them at all, Lemire said. They are being more cautious for the same reasons as the Germans.
Offshore Trend
Still, there has been some recent movement from across the pond, with Dutch-based ING having supplied funding for Clarion Partners to buy the Waltham Woods office complex in Waltham. That suburban office project is the second local deal ING has been involved in, following up on Clarion’s purchase last year of the Museum Towers apartment complex in Cambridge for $108 million. Fetgatter added that there has been some activity from Middle Eastern countries such as Saudi Arabia and Kuwait, and said Great Britain investors are also beginning to look abroad after retrenching during the 1990s.
There does seem to be a general trend again to go offshore, Fetgatter said. We haven’t seen a lot of it yet, but some of our British members are at least starting to talk about it.
Even if that were to happen, however, most industry observers spoken with said the German investors provided the lion’s share of the overseas funding, with Fetgatter acknowledging that at this point, there’s not any great story like the Germans.
There is some evidence that the United Kingdom may increase [its U.S. investment], but in total dollars it will pale in comparison to what the German’s were investing, Olsen seconded. There’s really nobody to replace the capital that we saw coming [from Germany] in 1998 and 1999. While last year’s numbers are still unavailable, AFIRE reported there was $5.2 billion of overseas investment in U.S. real estate in 1998, a 30 percent jump over 1997. The German piece of that total was estimated to be well into several billion dollars, with Asian interest remaining almost nonexistent.
Even with the recent difficulties, German investors will not abandon Boston entirely, most agreed. One German financial institution known as Despa has been circulating locally, for example, while German-backed Taurus New England Investments has been a major buyer for some time. At present, for example, Taurus is said to be purchasing 160 Federal St., a 355,000-square-foot office building in Boston’s Financial District. Some recent buyers who had planned to syndicate their buildings will likely hold onto them for the time being, Olsen added. The new owners of One Liberty Square in Boston – Transatlantica – reportedly has decided to delay its syndication of that Financial District building until conditions improve.
Taurus NE principal Peter Merrigan said last week that the euro has indeed slowed Geman investment in real estate. His firm, however, has avoided the pitfalls because its investors tend to be high-net-worth individuals who are better able to hedge their currency, Merrigan said, either having obtained their funding earlier or by churning capital earned from earlier investments into the newer deals. In addition, he said Taurus anticipated some of the euro’s difficulties, and sought funding from U.S. institutions to bolster its German capital.
You can’t be dependent on just one capital source, Merrigan said, adding that, For us, [the euro’s fall] has really had no impact.
Olsen agreed that players like Taurus have been insulated by the difficulties, and said German financial institutions also still have capital to spend. But he also stressed that the syndication monies represented the greatest share of German capital, and said that will mean difficulty over the coming months for buying abroad.
The classic syndicator is gone or is certainly sitting on the sidelines, Olsen said, adding that, Without equivocation, there will be a dramatic decline in the investment volume [from Germany] through 2000, and at least into the first half of 2001.