Foreign Inflows

TRD’s analysis of the top 12 countries investing in commercial real estate in Los Angeles in the past two years reveals Asia and the Middle East lead the pack

October 16, 2017
By Donna M. Airoldi and Harunobu Coryne

Foreign investors and developers pumped more than $8.28 billion into the commercial real estate landscape in Los Angeles County in the last two years, making L.A. one of the hottest markets for foreign capital in the U.S, according to an analysis of Real Capital Analytics data by The Real Deal.

Singapore and Qatar led the way, with more than $2 billion each, followed by Canada with $1.6 billion. And despite tighter capital controls in China, the country still ranks as one of the top foreign investors in the city, even though its buyers spent a bit less during this period than in the prior two years.

TRD’s analysis included investments by any foreign-owned firm that bought more than $50 million in real estate in the two years from June 1, 2015, through May 31, 2017, in L.A. County.

What makes L.A. so attractive to overseas buyers is its strong and stable fundamentals, experts said. “We have a tremendously powerful economy, and it’s diversified,” said Michael Zietsman, international director of JLL. “It’s by far the biggest economy in the western U.S.”

There’s also a dense population, people with spending capital, better yields compared to other top markets and job growth outpacing other areas of the country, said Joe Cesta, who leads CBRE’s capital markets group for Southern California and Hawaii and who is also the managing director for the Inland Empire. “Those are all the indicators that point to a strong, stable real estate market,” he said.

The L.A. industrial sector is particularly attractive to international investors for two reasons, said Cesta: the large population that the industrial base serves, and its location. 

“As goods come in from overseas, it’s logical to land here and then ship cross-country,” he said. “As e-commerce continues to grow, I think L.A. and its surrounding counties will continue to benefit from that and its strategic location and proximity to China.”

The Port of Los Angeles and the Port of Long Beach were the two busiest seaports in the country in 2015 per the U.S. Department of Transportation.

“Logistics, as we now call it, is the darling of the industry. Everybody wants to buy some industrial property,” Zietsman said. “Industrial cap rates are still going down,” he added, which indicates lower risk.

Overall, cap rates for commercial real estate in L.A. stabilized in the first half of 2017 compared to the second half of 2016, according to CBRE data. In addition to industrial cap rates tightening, office and multifamily sectors remained unchanged at 5.56 percent and 4.75 percent, respectively, while retail and hotel cap rates increased — with the retail rate climbing from 6.33 to 6.42 percent from Dec. 31, 2016, to June 30, 2017, and hotel cap rates increasing from 7 to 7.5 percent over the same period. The outlook for the second half of the year is continued stability.

As for any potential challenges to the influx of foreign capital, the EB-5 program is due to expire on Dec. 8. The program provides foreign investors with permanent residence in the U.S. in exchange for commercial investments of $1 million that create or preserve at least 10 full-time jobs. Between 2010 and 2013, California ranked first in the nation for EB-5 investments, narrowly beating out New York, according to data from Invest in the USA, an EB-5 trade association. Interest in the program from overseas investors and domestic developers has grown rapidly since the Great Recession, when other sources of capital dried up. It especially encouraged development of hotels, noted Zietsman.

Other factors that could affect the international flow of capital to the U.S. include the Federal Reserve raising interest rates and the Trump administration’s proposed tax plan, said Cesta. “Then we’re also in real estate, which is cyclical,” he added. “Things get hot and things cool down. We don’t see that cooldown in the near future, but any one of those items could begin to soften the market.”

Biggest spenders and what they’re buying

Asian countries led investments, accounting for 42 percent of sales over $50 million to foreign-owned firms, according to TRD’s analysis.

“Look at some of the major developments in L.A. the last few years. Greenland USA developed the massive Metropolis Complex. Korean Airlines just built a hotel with offices and retail at Wilshire and Figueroa,” said Zietsman, referencing the Wilshire Grand Center, which opened in June and is the tallest building west of the Mississippi River. “That’s Asian capital coming and completely changing the skyline in downtown.”

And while four European countries made the top 12, their share was only 14 percent of foreign investments above $50 million over the past two years.

“What [L.A.] lacks is many of the European investors,” Zietsman said. “They want modern buildings, built in the last 10 to 15 years at most. And we just don’t have many of those.”

Still, combined outlays from European buyers in the past two years surpassed the $1 billion mark.

Here’s a look at the top cross-border investments into the L.A. commercial market since June 2015.

Singapore: $2.26 billion

Despite retail’s recent woes, prime properties in that asset class remain attractive to overseas investors. Singapore firms made hefty retail transactions in L.A. in late 2015, purchasing a $1.38 billion interest in the Lakewood Center mall and $873.5 million in the Los Cerritos Center. Both purchases were made by the country’s sovereign wealth fund, GIC.

In addition, Asia’s biggest warehouse operator, Global Logistic Properties (GLP) — whose parent company was also Singapore’s sovereign wealth fund — acquired several warehouses both in L.A. proper and in the Inland Empire counties from 2015 through 2016. A Chinese consortium purchased GLP in July, however, for $11.6 billion.

Qatar: $2.08 billion

Qatar is betting big on L.A. office space. Since February 2016, the Qatari Investment Authority (QIA), which manages the oil-rich country’s wealth, has purchased several Blackstone office properties in L.A. and Santa Monica through a partnership with Douglas Emmett Inc. (DEI), a Santa Monica-based REIT.

The deals include $476.5 million for 10960 Wilshire Boulevard; $433.5 million for the Oppenheimer Tower at 10880 Wilshire Boulevard; $285 million for the Wilshire Palisades at 1299 Ocean Avenue; $271 million for the Westwood Center at 1100 Glendon Avenue; $168 million for the Tower at 10940 Wilshire Boulevard; $139.5 million for the Searise Office Tower at 233 Wilshire Boulevard; and $77 million for 429 Santa Monica Boulevard.

The partnership also spent $224.5 million for 12100 Wilshire Boulevard in July 2016, buying it from Hines.

And after this ranking’s May 31 cutoff date, DEI and QIA forked over roughly $188 million, or about $1,100 per square foot, for the 171,000-square-foot Class A building at 9665 Wilshire Boulevard in Beverly Hills, again to the Blackstone Group.

Canada: $1.6 billion

The last of the billion dollar spenders in this group, Canada has long been one of the top cross-border investors into U.S. commercial real estate. Our neighbor to the north has made more than two dozen purchases in the L.A. region over the past two years, covering the industrial, office, apartment and hotel sectors, plus a development site — and looks poised to continue the spree, as Canadian investors have made additional office and industrial purchases since June.

“I think it’s two things. As the Canadians look at opportunity in their own market and across the world, they look at stability and yield,” said Cesta. “L.A., again, represents a very strong opportunity to place capital.”

Vancouver’s Onni Group spent nearly $450 million on six office purchases. The largest was $105 million to Tribune Media for the L.A. Times headquarters in September 2016. A year earlier, Ivanhoe Cambridge and Callahan Capital Partners (CPP) picked up the Pac Mutual tower for $200 million. The CPP Investment Board spent a combined $287.5 million on 10 industrial site purchases sold by GIC and GLP.

Canada’s June 2017 deals included $700 million for industrial space at 747 Warehouse Street by the Healthcare of Ontario Pension Plan, and Brookfield paid $440 million for the California Market Center office space at 110 East Ninth Street, according to reports.

France: $519 million

L.A. has been home to some record retail transactions in recent years, including Chanel shelling out $152 million in December 2015 for the shop at 400 Rodeo Drive it had been leasing. That worked out to $13,217 per square foot, a square-foot price record for retail space in California. But that record lasted just six months, until LVMH picked up the Bijan store down the block at 420 Rodeo Drive for $122 million, or $19,405 per square foot, in July 2016.

The biggest deal by a French investor, however, was the $245 million spent by AXA Real Estate Investment Managers in April 2016 for a 49 percent share in the Peoples Bank Building at 5900 Wilshire Boulevard.

South Korea: $472.1 million

Before its chairman was arrested at the end of December 2016 as part of a corruption scandal, South Korea’s National Pension Service — one of the largest pension funds in the world — purchased three properties that are part of the Runway Playa Vista mixed-use development located on the 12000 block of West Millennium Drive. The $472 million deal, completed in February 2016 through Invesco Real Estate, included $270.5 million for 217,000 square feet of retail space, $175.5 for 420 apartment units and $26 million for 33,000 square feet of office space in the newly completed complex.

Germany: $380.1 million

German investors have focused on the solid office space market with two major purchases over the past two years.

CBRE Global Investors sold its downtown headquarters at 400 South Hope Street in May 2016 for $319.3 million to a joint venture between PNC Financial Services and the Munich-based real estate fund manager GLL Real Estate. And in September 2015, Jamestown, the Atlanta-based arm of Jamestown US Immobilien GmbH, an investment firm in Cologne, Germany, picked up the Brunswig Square building at 360 E. Second Street for $60.8 million.

China: $311.1 million

Outlays from Chinese investors managed to secure the number seven spot on TRD’s list of cross-country deals in L.A., down from $339.6 million during the prior two-year period, a 2.5 percent drop.

Local experts don’t seem particularly worried about China’s new tighter foreign investment rules. At the first TRD Showcase & Forum held in L.A. in September, panelist Steve Silk of Eastdil Secured said that China continues to put a tremendous amount of money into U.S. real estate, but now the money will shift into things that will benefit the Chinese economy long term.

The biggest Chinese purchase within the two-year period of this ranking was the $156.6 million paid by Elite International Investment Fund and Future Land to AIG Global Real Estate for the Alhambra office building at 1000 South Fremont Avenue.

US OCG, the American arm of OCG China, spent $52.5 million in July 2016 for the LAX Holiday Inn, while Gemdale Corp., a Chinese real estate developer, dropped $51.3 million for office space at 1377 North Serrano Avenue in September 2015. Additional Chinese buyers in L.A. include Cindat Capital Management, Unionlife Insurance Company and Greenland Group.

Japan: $273.1 million

Japanese investors made only one purchase during the time frame TRD analyzed, but it was a major one: In December 2016, in its first U.S. deal, the Japanese conglomerate ASO Group purchased the Google-leased hangar and three surrounding buildings at 5865 South Campus Center Drive from a partnership between the Ratkovich Company and Penwood Real Estate Investment Management. EGW Asset Management represented ASO in the deal.

TRD reported at the time that ASO “wants to keep focusing on California.” Both JLL’s Zietsman and CBRE’s Cesta noted that they’ve also heard that Japanese investors want to increase their presence in L.A.

“There’s just not that many opportunities for them to get reasonable returns in Japan. It’s a closely held market,” said Zietsman. “If you own a major commercial property in Tokyo, or [anywhere in] Japan, you just don’t sell it. So investors are looking for diversification and slightly better returns than the domestic market.”

Added Cesta: “As far as industrial is related, we’re understanding that Japan is looking to make a larger entrance into the market. We’ve had some meetings with their large institutions, and they’re looking to allocate more funds to the U.S., specifically into
this region.”

Switzerland: $191.5 million

Europe’s famously neutral country has been steadily investing in office and retail space in the L.A. metro area. The largest purchases by a Swiss firm were for office properties at 2400 and 2350 Empire Avenue in Burbank for $46.2 million and $34.2 million, respectively. Switzerland’s UBS Realty Investors secured the properties from CBRE Global Investors in August 2015. According to the Los Angeles Business Journal, the buildings’ combined square footage is nearly 230,000, making for an average of $350 per square foot paid.

On the heels of that deal, UBS then picked up the office space at 9033 Wilshire Boulevard in Beverly Hills for $75.1 million from Archway Holdings in December 2015. Rounding out recent Swiss buys was the retail cinema space at 8540 Whittier Boulevard in Pico Rivera, purchased by UBS Realty from Krikorian Premier Theaters for $36 million in March 2016. UBS upgraded the space to the Cinépolis brand, and the location features reclining leather seats and 14 screens, including a 4DX auditorium.

Hong Kong: $83.4 million

Investors from this special administrative region of China have diversified their more than $83 million into L.A. with condominium, office and industrial purchases. San Francisco’s Pacific Eagle Holdings, whose parent company is the Hong Kong-based builder Great Eagle Holdings, paid $62 million to the Carlyle Group, the D.C.-based private equity firm, in September 2015 for the Villa Malibu rental community and converted it to the Cavalleri condominiums.

Downtown Properties, a subsidiary of Hong Kong-based private equity real estate company Gaw Capital Partners, made two purchases: $11.5 million to Andrea Goodman in July 2015 for the office space at 1370 St. Andrews Place, and $9.9 million to the Chu 2001 Family Trust and East West Bank in March 2017 for the industrial space at 315 Aurora Street.

Thailand: $75 million

Capping off the Asian buyers in TRD’s analysis was the Kingdom of Thailand, with investor Thosapong Jaruthavee purchasing an 80 percent stake in Sunset Tower Hotel at 8358 Sunset Boulevard in June 2015. But this West Hollywood love affair didn’t last long; Jaruthavee sold his investment — which had appreciated to $100 million — to New York billionaire Len Blavatnik in June 2017, as the Los Angeles Business Journal reported.

United Kingdom: $50 million

The $50 million purchase of a retail spot at 1437 Third Street, along the Santa Monica promenade, by the U.K.’s private equity firm Meyer Bergman in June 2015 rounded out TRD’s list. The 7,500-square-foot space currently houses a Converse shoe store.

 

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