Boston’s 1.2 million-square-foot 125 High St. is among the local properties currently under German ownership.
Imagine taking a 4,000-mile shopping trip and finding nothing to buy, and one might understand the current plight of German investors seeking commercial real estate opportunities in Massachusetts. After dominating foreign capital investment in the Hub for much of the past decade, and despite regulatory change rules making it easier to purchase overseas real estate, German players have done little in the way of acquisitions locally thus far in 2003.
The dearth of Rhineland deals comes following a down year for foreign investment in U.S. real estate, with the Association of Foreign Investors in Real Estate estimating that such sources spent about $40 million below the $282 million of U.S. real estate assets they had expected to purchase in 2002. That made for a 7.3 percent decline over 2001 totals.
But while 2003 sales of such Boston properties as the John Hancock Tower portfolio and 3 Post Office Square have had a domestic flavor to them, industry observers insist that foreign interest remains strong, with Germany still leading the pack. According to Cushman & Wakefield principal Edward C. Maher Jr., an expert in foreign investment, the number of German capital funds actively seeking out real estate in Boston has nearly doubled over last year.
The problem, Maher explained, is that foreign buyers in general have specific tastes when it comes to real estate, typically favoring low-risk or no-risk opportunities over those offering higher returns in return for a level of vacancy or a somewhat off location. “They are very particular,” said Maher, adding that “there is no shortage of German money, there’s just a shortage of product [because] they are so narrowly focused.”
In the case of the Hancock portfolio, acquired by Boston-based Beacon Capital Partners, the sheer size of the $910 million deal likely kept overseas money from bidding on the package, said Gary J. Lemire of CB Richard Ellis/Whittier Partners. Meanwhile, Cornerstone Properties of Connecticut has stepped forward to purchase 3 Post Office Square, exhibiting future confidence in Boston’s Financial District.
As evidenced by German ownership of Boston’s 1.2 million-square-foot 125 High St. and 1.1 million-square-foot One Federal St., the syndicated vehicles which raise their capital through $50,000 increments from German individuals can often be rather large. But the Hancock deal was apparently too hefty to efficiently attract such capital, and there currently are only a handful of tower buildings available at present. Given that, much of the hope for German real estate deals for 2003 likely will be concentrated in the smaller properties and portfolios that are currently being put on the block.
Over the years, German money has rushed to purchase smaller downtown Boston office buildings such as 84 High St. and One Liberty Square, with the manageable size and traditional architecture providing a European flavor to such buildings. Alluding to those qualities, Spaulding & Slye Colliers broker Catherine F. Daume said recently that she believes German investors will show interest in the portfolio of three older Financial District office/retail buildings recently put up for sale by owner Fairlane Properties.
German investors “are going to love the feel of these assets,” said Daume, who is brokering the trio with Spaulding & Slye broker Scott J. Jamieson. Totaling 135,000 square feet, the buildings at 15 and 33 Broad St. and 112 Water St. carry an asking price of $26 million.
Maher said there has been a rise of acceptance toward multifamily and retail deals by German investors, but he stressed that a property must still possess solid fundamentals in order to attract such capital. The more ominous outcome for Boston is that Germans are looking at other markets for potential investment, with Maher citing Washington, D.C., as being a hotbed of activity at present.
“There’s just more product available in [Washington],” said Maher, who places Boston third behind the nation’s capital and New York City in terms of German real estate activity. AFIRE reports a similar trend, listing Washington as the best city globally for foreign real estate investment in 2002, and also giving it the top spot among U.S. markets. But after finishing at least third in recent years, Boston did not even make the top five list in 2002, with New York City ranked second, followed by Los Angeles, Chicago and San Francisco.
Locally, there was one apparently close call in the sale of 745 Atlantic Ave., the 11-story office building located next to Boston’s South Station. Although officials for the broker, Holliday Fenoglio Fowler, did not return phone calls to discuss the matter, two German investment sources were initially said to be the top bidders for the 168,000-square-foot building. The arrangement fell apart, however, after the winning bidder reportedly became entangled in a dispute over the due diligence phase, and sources say it now appears that an Australian group has agreed to purchase the building.
