Since its peak in July 2001, the dollar has lost more than 30 percent on a trade-weighted basis.
With the level of interest as strong as it has been, some developers are having flashbacks to the 1980s, when Japanese business groups came in and bought many trophy buildings in large cities. But there are some key differences with the latest wave of acquisitions, analysts said.
Michael McMenomy, senior managing director of investment properties for real estate services firm CB Richard Ellis in Los Angeles, said what separates the latest wave of foreign investors from earlier ones are their motivations and their business profile.
While in the 1980s, there were mostly Japanese development groups and business corporations buying the office buildings, in the current cycle, experts say, it's mainly investment managers and pension funds looking to diversify their investment portfolio. Real estate is attractive to them because the real estate yield relative to the corporate bond market and equities market is providing a very competitive return.
The most active countries, experts report, are Australia and Germany. In Australia, compulsory contributions by employees to retirement plans were increased to 9 percent in 2002.
In Germany, motivations are similar, with growing needs to provide long-term pension benefits for an aging population.
Foreign buyers tend to be attracted to trophy high-rise office buildings. The markets that are most attractive are capital market cities like New York, Washington, San Francisco, Los Angeles and Chicago, markets where new office supply is difficult to create.
In Washington, about 15 percent of the regional year-to-date acquisition total for CB Richard Ellis has been in transactions that involved offshore capital, said Bill Prutting, Jr., first vice president of investment properties/institutional group with CB Richard Ellis.
Recent purchases by foreign buyers include an office building on E Street purchased for $56 million by a Middle Eastern investor and another office building on M street purchased for $95 million by Prudential on behalf of TMW, a German investment fund.
The increased foreign buying might be good for sellers, but it could make life more difficult for U.S. buyers as the competition drives prices higher.
On the other hand, rising interest rates will put pressure on cap rates to go up — and values to go lower. That scenario is more positive for buyers.
