For U.S. real estate, a glimmer of hope Overseas investors hope bargains go with the territory

December 01, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

New York -- In July, ABP, the massive Dutch public employees pension fund, poured $85 million into a New York-based real estate investment trust with a $1 billion portfolio of apartments and strip malls in Maryland and other Eastern states.

In October, Jones Lang Wootton, an international real estate advisory firm, announced a $50 million-to-$100 million fund, with the cash coming from the Middle East, to make selective real estate investments. Their target: companies having trouble raising capital from banks and other traditional sources.

Slowly, gropingly, overseas investors are again peering into the abyss of U.S. real estate, searching for bargains in the wake of the disastrous overbuilding of the wild 1980s. After a buying spree that led some critics to complain that the United States was being sold at fire-sale prices, foreign purchases of U.S. real estate all but ceased this year.

The dollar has declined significantly -- and prices have declined radically. But those two factors still pale in comparison to declines in the perceived value of property, the willingness of any financial institution to extend credit and the courage of a buyer to go against the herd.

How bad is it? A new top-flight building that cost $400 a square foot in the mid-1980s in central New York City can now be built for $300 a square foot -- or purchased complete for $200 a square foot.

And purchase cost is only the beginning. The marketing and improvements required to lure tenants, as well as associated costs, add plenty to the building's price.

"If you have cash, you have little competition, but there are no markets that appear promising. There are just pockets of opportunity," said H. Rennison Merritt of Aldrich, Eastman and Waltch, a Boston-based real estate advisory firm.

Many of the most aggressive buyers of recent years -- including British, Japanese and Canadians -- have been badly burned. And some are taking a radical approach to coping with bad investments.

"At some point, it's a headache not worth having and you can cure it. You can dump properties and get out, but it hurts," said Nicholas Renny, managing director of the New York office of Chesterton International, an advisory firm based in London.

The result is a series of distress sales in many of the country's largest cities. Scaring up buyers, though, can be difficult.

Consider the real estate subsidiary of Equitable Life Assurance Society, which was among the first to consummate major joint real estate purchases with a Japanese insurance company. It combined with Nippon Life in 1981 to purchase a building on Madison Avenue in New York City and later was involved in more than $2 billion in pooled investments with overseas investors, much of the money coming from Japan.

But its last major U.S. deal was in 1989. "Transactions are down across the board," said Jonathon Miller, a vice president at Equitable. Stability, he predicts, might come in the first half of 1992.

That's an optimistic perspective. Others suggest that a general rebound could be two, three or more years away, though all forecasters note that real estate rebounds have often come out of such gloom.

Tough times have purged the glamour-factor from evaluating purchases. The foreign (mainly Japanese) stampede for "trophy properties" such as Rockefeller Center, Tiffany's Fifth Avenue headquarters and similar buildings stretching from Capitol Hill in Washington to Rodeo Drive in Beverly Hills, Calif., has ceased. And many of the buyers are stuck with true trophies -- empty vessels best used for decoration.

Today, address and architecture take a back seat to the aesthetics of a property's rental contracts. The definition of a beautiful building is any structure with bullet-proof long-term leases, an immediate yield on investment of 12 percent to 14 percent and additional space that can be leased if the market improves, said James Gorman, executive vice president of the Real Estate Research Corp. in Chicago. Few buyers, he adds, have any expectation for immediate, or large, capital gains.

Underscoring the sharp-pencil approach is a stunningly high vacancy rate. Salomon Brothers estimates that about 20 percent of metropolitan office space is empty, an amount that could take 17 years to fully absorb. Construction has declined by almost 80 percent since the 1986 peak, but any new supply comes on top of space freed up by companies shedding employees.

In contrast to the bleak realities of the current market, recent Commerce Department statistics for direct overseas investment in U.S. real estate stand as a vivid testimony to another age. The most recent numbers, released in May and covering 1990, indicate another record year, with the Japanese once again setting the pace.

But in retrospect, it appears the market had already begun to cool. Mitsubishi's $846 million investment in Rockefeller Center, at the time portrayed as another step in the Japanese acquisition of America, may have been the peak.

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