Investment professionals believe this is the year more foreign capital will make bigger plays for stateside assets. It’s unclear, however, whether enough assets will be marketed, or foreigners can take advantage of opportunities where other developers fail.
“The shrinking inventory of available trophy product is now severely mismatched against a queue of global institutional investors who still view New York real estate as the best, risk-adjusted safe-haven investment option,” says Douglas Harmon, chairman of Cushman & Wakefield. “The pricing strength of late comes from today’s significant imbalance of supply versus demand.”
Except for those closings left over from 2015, there were not a lot of billion-dollar assets that traded in 2016. Nevertheless, Harmon’s team handled nine of the city’s top 10 billion-dollar sales and recapitalizations in 2016 while still with Eastdil Secured, including: the $1.95 billion sale of 787 Seventh Ave. to CalPERS; the $1.65 billion sale of 1285 Sixth to RXR and China Life; and the $1.45 billion sale of the Sony Building at 550 Madison Ave. to the Olayan family.
Harmon, along with Adam Spies and other team members, joined Cushman & Wakefield’s global capital markets group in October. They expect to be marketing new properties soon.
In early January, the only core trophy asset launched to market was 245 Park Ave., a 1.8-million-square-foot tower being sold by Brookfield Property Partners and the New York State Teachers Retirement Systems through Vice Chairmen Darcy Stacom and William Shanahan of CBRE, which could go for $1,100 per foot, or $2 billion.
Shanahan declined to comment on 245 Park. But in general, he says, the mood has gotten better since the election and investors are feeling good about putting money in New York. “Brexit is leaving real questions about London, as no one knows what the impacts will be,” he says.
Last year, Shanahan and Stacom represented SL Green Realty Corp., which sold a 40 percent stake in 11 Madison Ave. to a US investment group, PGIM Real Estate, revaluing the building at $2.6 billion. Another 9 percent can change hands this year.
Shanahan notes that because of US tax laws, foreign investors generally try to own stakes less than 50 percent, making them perfect for local partners.
JLL reports that in 2015, 15.4 percent of commercial real estate investments in the US came from overseas.
According to Cushman & Wakefield, in 2016, New York increased its global market share in commercial real estate from 7.8 percent to 9 percent.
In a January survey, Association of Foreign Investors in Real Estate (AFIRE) members said they will maintain or increase their investment in the US with New York City at the top of the list. It’s the third year NYC is the top global city.
While AFIRE members’ intentions are lofty, there have to be assets to buy. Trophies aren’t coming to market because there’s no pressure to sell, explains Woody Heller, global head of capital markets at Savills Studley. “An investment sale is an elective decision, and the owner doesn’t have to sell unless it’s a fund and coming to the end of the fund life.”
Heller also believes foreign investment will continue at a brisk pace as other, non-traditional reasons propel overseas interest.
While some US investment fundamentals are under pressure and could lead to lower prices, the international markets are under more stress — so that money is targeting the US.
“I don’t think cap rates will shrink, but they will be sustained through the support of foreign money,” Heller adds of lower rates of return.
Wary buyers may also sell because they expect president-elect Donald Trump to shrink capital gains taxes.
For land sales, Heller predicts, “the market will begin to recalibrate its expectations and therefore transaction volume will increase.”
Foreigners often look at transactions in other languages. That’s why a deal looks better to some Asian investors when an owner/seller remains or they join with a local partner, according to Will Silverman, managing director, Hodges Ward Elliott.
“Say you’re on the acquisitions team in China and someone is explaining loss factors,” Silverman says as an example of quirks that are confounding to all but NYC experts. “Deals where there is a local sponsor staying in gets you [as a foreigner] over the concerns you may have about buying the right deal.”
More foreigners are also becoming city developers, with varying success. “A rising tide makes everyone float to the top and makes anyone look like a developer,” notes Adelaide Polsinelli, a partner with Eastern Consolidated. “But you need the skill set and to know how to keep everyone [working] on the same page.”
Because the luxury apartment market has slowed, and the 421-a program is not in play, even the best capitalized buyers may have problems completing their transactions. If the deal is by a tier-one developer who purchased at a low basis, it could be financed and/or refinanced. But if undercapitalized, or where buyers paid a high per-foot number for the land, it will likely not get the money it needs.
“That’s where you’ll see stress points in the market,” says Dustin Stolly, managing director of capital markets, JLL. “In [the city] that’s where opportunities will be.”
