Foreign Investors Are Seeking Portfolio Sales, Value-Add Opportunities In Chicago In 2018

Public safety and fiscal issues have not stopped foreign investors this cycle from deploying capital in Chicago real estate where they are able to find opportunities, ranging from trophy assets to portfolios, to park their money. And that did not change in 2017, even as asset classes like office and multifamily began to show signs of softening.

But 2018 is a new year and with it comes new challenges as more foreign money enters a marketplace with a reduced number of opportunities and sellers seeking high bids for their assets.

Here is what will be new in foreign investment in 2018.

In Industrial, More Competition For Portfolio Deals

Transwestern Midwest President Mike Watts said industrial real estate remains the most in-demand real estate class, nationally and locally, with tremendous interest from foreign institutional investors over the past 24 to 36 months resulting in several major portfolio sales like Blackstone Group's $1.8B acquisition of a 22M SF portfolio from Cabot Properties. Watts said Canadian investment is heavy in Chicago and other Midwestern markets, because the country's economic fundamentals make it easier to interact with the U.S. Watts also sees significant activity from Korean and Singaporean wealth funds. Both are looking for bigger portfolios and approaching operators, but these funds prefer to be the majority partner. Watts said this competition from foreign interests in portfolios picked up steam last year, thanks to Chicago's strong industrial market fundamentals and a lack of individual assets for sale. 

"Everyone wants industrial, but few buyers can get it. And if you have industrial properties and want to sell, you cannot redeploy money into new product," Watts said.

With all this dry powder in the sector, Watts said institutions not normally enamored by development are now open to becoming programmatic partners with industrial developers. This allows institutions to implement a build-to-core strategy, developing and adding assets to their portfolio, and Watts said the numbers show it is cheaper to build to core than to buy in an open bid situation. 

In Office, An Opportunity To Build Portfolios In The Suburbs

Office real estate investment was slow in 2017, which Watts called a transition year caused by a disconnect between buyers and sellers.

"Buyers adjusted pricing to account for new construction being delivered. Sellers have not and we're seeing a big differential in basis points," Watts said.

Owners of downtown assets still have the option to refinance their buildings if bids do not meet the asks. Watts said in many instances, buyers assumed the existing debt for larger assets that traded over the past five years and can refinance at better terms than the loan in place. For foreign investors looking to build scale, the suburbs are becoming a more attractive option. Watts said Canadian money is leading the charge here, depending on an asset's location and the rent rolls in place. 

"Canadians love the diversity the suburbs can offer, and they can put a portfolio together," Watts said. An example of this is Balfour Pacific Capital's $78.3M deal for One Park Place and 500 Park Blvd. in Itasca last November.

Suburban Hotels Are In The Sights Of Foreign Money

New hotels entering the market like Londonhouse, the Marriott Marquis Chicago and the Cambria Chicago Loop hotel have contributed to a two-year softening of the city's hotel market. Marcus & Millichap Associate Ebrahim Valliani said the heavy development has foreign investors entering the market looking for opportunities in the city and suburbs. 

Valliani said the foreign interest in suburban hotels is not surprising, as they are wary of Cook County's high taxes. Foreign investors have cast a wide net, seeking opportunities as far as Kankakee, Kenosha, Wisconsin, and Northwest Indiana. These investors are seeking hotels for sale in the $10M to $20M range with major branding like Hilton, Choice, InterContinental Hotels Group and Marriott that are in need of renovations. Valliani is seeing capital coming into the market from non-Saudi Middle Eastern nations, China, Korea and some Canadian investors. Indian and Pakistani investors are also entering the space via the EB-5 and E-2 visa programs.

"For most of these investors, dropping $20M on a hotel is like going to the ATM," Valliani said.

Valliani sees foreign interest in Chicago-area hotels growing this year as more supply is delivered. New hotels are forcing the owners of older properties to reinvest in their assets in order to compete with the new product.