The Real Deal New York

Buyers from oil-rich nations pivoting to CRE

Investors increasingly spurning trophy resi buys in favor of income-producing properties

February 02, 2016 08:31AM
By Farah Halime

Sheikh Khalifa bin Zayed Al Nahyan Karsten Kallevig

Sheikh Khalifa bin Zayed Al Nahyan, ruler of Abu Dhabi, the price of Brent Crude (credit: FRED), and Norges’ Karsten Kallevig

Deep-pocketed investors hit by the plummeting price of oil are increasingly focusing on commercial property investments as they pull back from trophy residential acquisitions, brokers say.

Oil has fallen to the low-$30s a barrel from about $115 a barrel in 2014, causing major financial heartburn for oil-dependent economies including the Middle East, Kazakhstan, Norway and Russia. Real estate experts say investors from oil-reliant countries have become much more conservative about making splashy residential buys and are more likely to cast their sights on income-producing properties.

“Russia, Kazakhstan, Azerbaijan, and countries that were selling oil at $100 a barrel up to a year ago, all of a sudden lost all their revenues,” said real estate attorney Edward Mermelstein. Investors from those nations, who have been responsible for some of Manhattan’s biggest apartment deals, are already retreating from Manhattan’s high-end residential market, he said, and since cash flows are now a priority, “shifting to commercial investment as an alternative.”

Many of these investors are now focused on multifamily buildings, office condominiums and mixed-use buildings as long-term investments, Mermelstein said, though they remain partial to the Central Park corridor.

Since January 2013, of all the Manhattan commercial sales that foreign buyers were involved in, about 39 percent were office properties and 15 percent were hotels, according to CoStar Group data. Although the data doesn’t account for every transaction that uses international money because deals are often made through a domestic entity, Joseph Sollazzo, an economist at CoStar who compiled the data, said the trends are generally representative of “what property types foreign buyers have focused on.”

The overall office vacancy rate in Manhattan dropped to 8.5 percent in 2015, data from Cushman & Wakefield show, the lowest it’s been since the end of 2008.

Stratos Costalas of Oxford Property Group, who counts wealthy Saudi Arabians among his clients, said that splashy residential buys are off the table for cash-strapped investors.

“The vanity plays are nice,” he said, “but when times are tough, you have to be conservative.” Buyers of high-end condos, unlike those of commercial properties or more moderately-priced apartments, often struggle to recoup their investment through rental income — the market for $50,000 a month rentals, not unlike the market for $5,000 per square foot condos, is quite restricted.

Some of his clients are instead looking to buy properties such as hotels and mixed-use buildings, he said. Gennady Perepada, a broker who focuses on high-end foreign buyers, especially from Russia, said his clients are now looking at office condos on the Upper East Side going for between $17 million and $27 million. Perepada described these properties as a “safer investment.”

Overall, foreign buyers spent more than $87 billion on U.S. properties last year, from less than $5 billion in 2009, according to Real Capital Analytics. That number is expected to grow in 2016, according to the Association of Foreign Investors in Real Estate, with New York remaining the top target in the face of political and economic uncertainty in Asia and Europe. Just expect to hear a little less about oligarchs buying perches above Central Park.

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