Why Your Next Office Landlord Might Be German

Last year German real estate investor Commerz Real dropped $850M on Manhattan office building 100 Pearl St. in one of the biggest New York office deals since the pandemic. And it is not done in the U.S. yet.

Commerz Real is opening an office in New York in the second quarter of the year, Bisnow can reveal, as it looks to increase its exposure to U.S. real estate, which currently stands at about $2.5B.

“The U.S. is a significant part of our portfolio, and we’re looking to increase our activity there,” Commerz Real Chief Executive Henning Koch told Bisnow. “We’re concentrating on large gateway cities — we like the liquidity, the fact that it’s easy to get in and out, and there is a big yield spread in comparison with Germany.”

Commerz is not alone among German investors looking to put serious capital to work in the U.S., as the global cross-border real estate investment market starts to normalise after a staccato couple of pandemic-afflicted years. 

German investors have always been among the top investors in the U.S. As a nation of savers puts its faith in property and German institutional investors continue to grow, that relationship is set to continue, albeit with new headwinds to face in 2022. 

Commerz is the third-largest German investor into the U.S. over the past five years, data from Real Capital Analytics showed, behind insurance company Allianz and investment house Deutsche Finance International, and ahead of U.S-German investor Jamestown and pension fund BVK. 

Other German names to add to the roster include Deka, which at the end of last year bought a Whole Foods grocery store in Santa Monica for $54M, and Union Investment, which in October last year paid $120M for 57-65 East Oak St. in Chicago, a luxury retail property, its first U.S. real estate deal for three years. 

Last year German investors spent $2.2B in the U.S., RCA data showed, down from $3.9B in 2020 and a peak of $5.9B in 2019. There are reasons to feel that figure is going to climb from its recent low. 

Part of the appeal of the U.S. for German investors is that yield differential between the two countries.

“A lot of our German clients have been saying they will spend more in the U.S. in 2022,” Avison Young principal and Head of European Capital Markets Penny Hacking said. “Especially those institutional investors looking for long-dated income, they look at where [cap rates] are compared to their domestic markets.” 

While a prime office building with a long lease to a good tenant in Manhattan might trade for a cap rate of 4%-4.5%, a similar building in Berlin or Munich might trade at a cap rate of 3% or lower. 

Of course, there are a lot of caveats to factor in. Cap rates in Germany are lower because office markets in the largest German cities typically have lower vacancy rates and are deemed less risky. In addition, overseas real estate investors have to pay higher tax when they sell U.S. commercial real estate than their domestic counterparts, which often erodes that yield differential.

There are other elements German investors will consider in 2022 as well.

“Right now, most people are factoring in three interest rate rises in the U.S. in 2022, whereas in the Eurozone, the expectation is that rates won’t rise for some years,” CBRE Investment Management Chief Economist and Head of Insights and Intelligence Sabina Reeves said. “The impact of that is to increase hedging costs, and so investment in the U.S. for European investors becomes more expensive.”

That means the U.S. looks less appealing in the immediate term for investors who take out a currency hedge to mitigate the impact of a fall in the value of the dollar against the euro. 

It comes down to whether a European investor thinks the performance of its U.S. investment will outweigh the downside of paying more tax and higher hedging costs. There are plenty of signals that German investors are making that bet. 

"Peak of Covid, I get a call from one of our pension fund investors in Germany. They asked me, 'Is there blood on the streets?' Everybody wants to see blood on the streets," Shvo Chairman and Chief Executive Michael Shvo said.

Shvo has teamed up with German investors including Deutsche Finance on up to $2B of U.S. deals in recent years.

"And I said, 'Yeah, there’s blood on the streets, but not on the streets we want to buy real estate,’” he said.

Commerz Real’s Koch put it less bluntly, but argued the firm sees an opportunity to pick up good U.S. assets at discounted prices because of the pandemic. He cites 100 Pearl St. as an example. 

“There were so many question marks about Manhattan offices, people saying that everyone will work from home so why will companies need offices in Manhattan anymore,” Koch said. “I’m still a really big believer in offices in these inner-city locations. Look at Facebook and Google — in 2020 and 2021, at the height of the pandemic, they have been leasing and buying huge amounts of office space in big cities, even as they were saying everyone could work at home in the future. Investing in offices in good locations, we thought it was a good opportunity.”

Commerz Real is investing in the U.S. for its Hausinvest fund, an open-ended investment vehicle with assets of more than €17B ($19B). Its investors are more than a million individual Germans who use open-ended funds like that managed by Commerz as a savings vehicle. And Germans love to save — Germans save about 12% of their household income, compared to 7% in the U.S., and those figures are normally much wider, with the pandemic narrowing the gap. 

After inflows from savers slowed during the pandemic because of worries about retail closures and the future of the office, Hausinvest has seen money start to flow back in during recent months, Koch said. German investors like Commerz, Allianz and others are of a scale that the U.S. becomes attractive for diversification reasons — when you get to a certain size you have to look beyond Europe to diversify your risk. 

Because it is investing on behalf of individuals, Commerz continues to look at low-risk, long-term investments primarily in gateway cities. The office in New York will allow it to undertake its own U.S. asset management and better scout for new opportunities, which are likely to continue to be in the office and hotel sectors. 

“There are some cities like Austin where you have a good investment opportunity, with tech companies moving there and big population growth,” Koch said. “But it is probably a bit early for us; we will continue to focus on gateway cities.”

As international investors become more comfortable investing in the U.S., they are likely to diversify in terms of sector, CBRE’s Reeves said. A big appeal of the U.S. is that sectors with strong demographic support — like life sciences, medical offices and multifamily, which institutional investors would like to access — are far more mature and less risky in the U.S. compared to Europe.

For now, investors like Commerz are more than happy sticking to the traditional real estate food groups in big cities and are likely to play an increasing role in U.S. capital markets.