If Manhattan’s commercial market has only one word for some of its biggest buyers, then lately, that’s been “Wilkommen.”
A favorable exchange rate, looser domestic investment regulations and years of low interest rates mean German investment funds, most backed by money from individual investors, have become major property buyers in New York, amassing a 16-million-square-foot portfolio that includes both Class A Midtown trophy space and, increasingly, purchases in other areas of Manhattan, including condominiums, Class B office space and Downtown properties.
While the peak purchasing period has probably passed, industry observers say the shift beyond the blue-chip properties of the past reflects a changing market on both sides of the Atlantic, and those shifts account for a more than 200 percent increase in total German investment here since 2001.
According to commercial market tracking firm Real Capital Analytics, German investors pumped $780 million into New York property in 2001 and have closed transactions valued at $2.5 billion for the year to date, making them the biggest foreign buyers in the city.
In the 1980s, Japanese buyers were by far the most prominent real estate investors, snapping up marquee properties that included Rockefeller Center and a stake in the Empire State Building, but those investments eventually yielded little in the way of profits.
German investors won’t be making the same mistake, says Barbara Knoflach, a senior managing director at SEB Immobilen Fonden, in Frankfurt. The 4.7 billion euro ($5.8 billion) fund last year bought 2 Park Ave. from Vornado Realty Trust for $292 million. Although the 964,000 square foot office building isn’t surrounded by the typical Class A space favored by foreign interests in the investment sales market, SEB thinks it’s a winner, she says.
“We are focusing on the income stream of tenants in their investment sale properties,” she says. “Trophy buildings usually have the highest volatility, and we are making conservative, income-oriented, long-term investments.”
That suits the dentists of Dusseldorf and the burghers of Berlin just fine – the individual investors who’ve given funds such as Jamestown Properties an average of 28,000 euros ($34,400) each are expecting steady yields of around seven percent, and U.S. properties have delivered.
New York remains the biggest U.S. market for funds such as SEB and Jamestown, buyers of a 25 and 75 percent interest in Chelsea Market, respectively. Real Capital Analytics figures show New York properties account for 71 percent of all $3.5 billion worth of German purchases of U.S. real estate this year.
“They invest in places that they know,” says Dan Fasulo, a Real Capital associate. “And every euro that comes this way is worth about 30 percent more than it was three years ago. These properties are looking very cheap.”
Changing Tastes Follow Changing Laws
Not long ago, New York was verboten fruit for German investment funds. Germany was long home to some of the most onerous investment restrictions in the European Union, but in 2002, the country liberalized its investment laws. The changes allow Germany’s 19 open-ended real estate investment funds to commit greater percentages of their capital outside the EU, lifting the 20 percent ceiling and allowing them to hold minority stakes in properties. That has allowed buyers such as DEGI, Deka, Kanam and the Paramount Group to get footholds in New York property portfolios.
In some of the big recent deals in addition to the Chelsea Market purchase, Jamestown this March paid $185 million for a 70 percent stake in 111 Eighth Ave., a 2.9 million square foot building at West 15th Street between Eighth and Ninth avenues. Last September, Frankfurt-based GVA Geno bought a majority stake in 150 Fifth Avenue. The 11-story, 208,000 square foot building at 20th Street serves as the North American headquarters of EMI Records.
The shift from Midtown offices reflects a market that’s also shifting, prompting prospective buyers to look harder for investment sales properties. This summer, the Federal Reserve Board approved two interest rate hikes of 25 basis points each, and put the key federal funds rate at 1.5 percent. That put sellers and buyers on a countdown clock, says Eric Negrin, a senior vice president at CB Richard Ellis, which late last year was involved in GVA Geno’s $102 million recapitalization of 150 Fifth Avenue, in which it remained in partnership with L&L Acquisitions.
“There are a lot of sellers, and there’s a lot more product these days,” he says. “Part of the reason is that people are trying to get product into market before anticipated rate increases accrue.”
Market observers say buying has subsided since a Haus-Invest global fund went into contract for the Manhattan Mall earlier this year in a transaction valued at $400 million. Still, the alignment of eager sellers and buyers that are newly confident in the New York market has kept brokers busy.
“There was a period [after the new law was passed in 2002] where nobody wanted to go first,” says Woody Heller, head of the capital transactions group at Studley.
“They wanted to let their retail customers know they were making a change, and so they had enormous surplus capital. They didn’t say ‘We’re anxious to be more flexible’, but these funds did say, ‘Ideally, here’s what we’d like’, but we’re willing to be more flexible.”
Yields Yield Deals
Flexibility, sagging equity market returns and a slumping bond market put other parts of Manhattan real estate on the boil, say brokers. The attractiveness of real estate yields means buyers are willing to pay for secure income streams, such as the one Knoflach saw at 2 Park Ave.
“We’re on pace to meet last year’s sales volume of $86 billion,” says Negrin at CBRE. “Even a six percent return looks pretty good compared to stock investments where you might actually lose money. And yield compression has become so great that Germans, along with other investors, have expressed interest in Midtown South and Downtown. Now they’re better known in the market and are proven closers.”
Steve Zoukis, a partner in Jamestown’s Atlanta office, says “a lot of people thought we’d lost our minds” when his group bought One Times Square in 1997. That willingness to cast a wider net brought them to the Chelsea Market deal and to the 111 Eighth Ave. deal his group closed in March, and he says investors are pleased.
“We have a brand in Germany that tells people we’re going to deliver highly reliable yield and at least modest appreciation,” he says.
But part of making investors happy, he says, is knowing when to pull back.
“We’re out of good ideas right now, and we think today’s market is just goofy,” he says. “There’s no way that we can, with a straight face, project even modest appreciation. We’re pretty much out of the market right now.”