LOIS WEISS: Where Have All The Americans Gone?

Just two years ago, 17 New York City real estate assets sold for more than $1B, and American firms bought 12 of them. Now, almost halfway through 2017, the city has seen just three properties sell for 10 figures — 60 Wall St., 85 Broad St. and 245 Park Ave. — all of them bought by foreigners.

Although investment by foreigners has dropped 33% since 2015, data from Cushman & Wakefield shows that at the top of the market, foreign investors willing to pay exorbitant prices have left thriftier and warier Americans on the sidelines.

“More foreigners are completing the big deals because more large transactions are now offered as sales of up to 49% stakes,” Cushman & Wakefield investment sales Chairman Douglas Harmon said. “There are still a lot of domestics and opportunity funds, but the foreign interest in that space has broadened and deepened and become a higher percentage of the final investors.”

The recent $2.2B sale of 245 Park Ave. to Chinese conglomerate HNA Group, brokered by CBRE, allowed previous owners Brookfield and the New York State Teachers Retirement Fund to take their dollar chips off the table. According to a Sandler O’Neill research report issued on June 2, Boston Properties made an offer $400M lower than what HNA paid for the 1.8M SF tower.

Total investment sales are off despite optimism that the Trump administration cut both taxes and regulations, which could benefit businesses and real estate investors.

“I think the days of $15 billion deals per year may be over for a while,” said Harmon, who has sold more billion-dollar buildings than anyone else in the world.

None of this is because U.S. investors do not have money to burn, they simply have sharper pencils and do not want to get burned by prices they consider out of whack with the expected income. While Americans are giving up on getting their hands on these prizes, they will be on more solid financial footing should any shakeout occur.

At a 2009 Bisnow forum, then-Vornado President Michael Fascitelli told the audience the company had passed on a marketing package that projected obtaining $185/SF for office leases in the building.

“They just leased and got about $80 a foot, and how do you think the guy [who bought it] is doing with that building?” Fascitelli said. “It was one of the worst meltdowns I have seen in my career.”

At the time, Vornado had almost $1.3B in cash and was “hoarding it till we see opportunities,” Fascitelli said. “There are a lot of smart people I respect who have no idea what’s going on.”

Those who bought at lower pricing after the market fell, however, are now sitting in envious positions. Indeed, investors and property owners who remained disciplined and bought wisely a few years ago now have assets that are worth more and can be leased at lower rents, if needed.

Foreign investors, meanwhile, are simply willing to take lower cap rates and lower returns just to get their money into U.S. assets. And therein lies one of the ever-looming investor conundrums: If I sell, what do I do with the money?

Established local real estate families and private equity fund investors are regimented when it comes to real estate. They know it well, they know what it costs to improve and operate, and where they can make real estate great again. But they are also shy about saving others from bad investments or providing a windfall to others, unless they can buy in at a cost that works within their model.

For instance, according to National Association of Real Estate Investment Trusts Chief Economist Calvin Schnure, REITs will not issue more shares to obtain capital to invest unless their share price is at a premium, i.e. above the value of their assets. REITs do trade in and out of assets to redeploy capital, but even that transactional volume has slowed as they bulk up cash and wait for the right opportunity where they can add value, rather than lose it.

That is also why as the price of city assets has increased, Americans have been sellers, and not one U.S. company has purchased any of the city’s billion-dollar trophies without partners. Those partners are typically foreigners these days.

There have not been any billion-dollar sales made solely to U.S. interests since early 2016, when deals closed that were contracted in 2015. 

At that time, Harmon brokered a deal for 787 Seventh Ave. for $1.95B to the California pension fund CalPERS. 1285 Sixth Ave. was sold for $1.65B to all locals — Scott Rechler’s RXR, Ruby Schron’s Cammeby’s International with David Werner and C&K Partners — but China Life was brought in as a partner after the deal was completed.

RXR had been the most prolific domestic trophy buyer, but now its partner for its 237 Park Ave. acquisition, Walton Street Capital, is selling its 49% stake in 237 Park. Harmon is marketing the share in the building, which traded for $1.2B in 2007, after which RXR and Walton were able to acquire it for $800M when its previous owner went bankrupt.

As buildings leap in value, selling a minority stake takes some of the owner’s money off the roulette table. Fresh equity is also used when large tenants are expiring and a pool of capital is needed to pay for work letters, pay for building-wide improvements, or just pocket to pounce quickly when other investments become available.

Harmon is marketing a 49% stake in 1515 Broadway for SL Green, which should fetch about $1B. The REIT will retain the management and leasing and is expected to keep the cash at the ready to deploy for other property.

SL Green, like other domestic companies such as Tishman Speyer, may own minority stakes in their buildings, but set up the partnerships so they can both manage and lease. Their partners tend to be hands-off pension funds or others like foreign investors, who are happy to have a New York professional do the heavy lifting.

Investment brokers who sell these recapitalization deals say the partners must be picked with care and may not have always offered the highest price. They are generally matched with the personality and investment desires of each.

Trinity Church sold a 44% stake to Norges Bank in 11 buildings through CBRE in 2016, revaluing it at $3.6B. Trinity wanted an operator, but the Norwegian bank offered more money than the locals. In a separate hunt, also by CBRE, Trinity and Norges chose Hines to operate the portfolio. But Hines had to fork over roughly $35M for about a 1% stake. 

There are several major building stakes on the market, and if the current trend persists, they may all be snapped up by foreign investors, with Americans being brought in to own small pieces of the pie while managing the properties. The Americans haven't left the high-stakes game of Manhattan office sales, and their stacks of chips might be just as big as their foreign counterparts. But their knowledge of the odds is preventing them from pushing enough money into the pot to take it home.

Lois Weiss is a Bisnow featured columnist as well as a real estate reporter for the New York Post. She has covered New York City real estate for more than two decades and is a past president of the National Association of Real Estate Editors.