FOREIGN DIRECT INVESTMENT IN CHICAGO REAL ESTATE
ARE FOREIGN INVESTORS DIFFERENT FROM DOMESTIC INVESTORS?
by
DEBORAH ANN NOONEY
B.A., Communications
Vanderbilt University
(1985)
Submitted to the Department of Urban Studies and Planning
in Partial Fulfillment of
the Requirements of the Degree of
Master of Science in Real Estate Development
at the
Massachusetts Institute of Technology
July 1987
Deborah A. Nooney 1987
The author hereby grants MIT permission to reproduce and to
distribute copies of this thesis document in whole or in part.
Signature of Author
Department of Urban Studies and Planning
July 31, 1987
Certified by
James McKellar
Director, Center for Real Estate Development
Thesis Supervisor
Accepted by
Michael Wheeler
Chairman
Interdepartmental Degree Program in Real Estate Development
1
AU 3 187
gOfto
ACKNOWLEDGMENTS
During the two month research and production period for this
study, over 50 individuals were contacted and interviewed.
These interviews were of critical importance and I wish to
thank those individuals who shared their time and their
knowledge with me. Without their assistance, my work would
have been much more difficult.
I would like to extend a special thanks to the National
Association of Realtors (NAR) who sponsored this thesis as
study examining foreign investment
part of a broader
In particular, I would like
patterns in the United States.
to thank Mariam Meyer, Manager - International Operations of
the NAR, Fred Flick, Director of Economic Research, and Sean
Burns, Economist for their personal time and assistance.
I would like to extend an additional thank you to the
faculty and staff at M.I.T.'s Center for Real Estate
Development for all of their help and support.
2
FOREIGN DIRECT INVESTMENT IN CHICAGO REAL ESTATE:
ARE FOREIGN INVESTORS DIFFERENT FROM DOMESTIC INVESTORS?
by
Deborah A. Nooney
Submitted to the Department of Urban Studies and Planning
on July 31, 1987 in partial fulfillment of the
requirements for the Degree of Master of Science in
Real Estate Development
ABSTRACT
The nature and level of recent foreign equity investment in
commercial real estate in Chicago, Illinois was analyzed as
one part of a larger study in which the transactions
involving foreign investors within three individual markets
(Los Angeles, Washington, D.C., and Chicago) are being
studied to
analyze current foreign
direct investment
patterns
in the United States.
This study identifies
foreign investors active in the Chicago real estate market
and determines if and how the foreign investors in this
market differ from domestic investors.
The findings indicate a foreign interest in approximately
seven percent of the existing office supply in the Chicago
metropolitan area and nearly 10 percent in Chicago's central
business district. Although less than comparable estimates
in Los Angeles and Washington, D.C.,
the findings indicate
that foreign investors are active in the Chicago real estate
market. This participation by foreign investors, especially
Japanese investors,is likely to increase in the foreseeable
future.
Additional
findings include
the
following:
significant
differences exist among foreign investors active in the
United States; the longer foreign investors are active in
U.S. real estate, the more they appear to resemble domestic
investors;
foreign
investors
have
strong
product
preferences;
some foreign investors are willing to pay a
premium for some types
of U.S. real
estate;
foreign
investors have a longer term view, foreign investors tend to
be more relationship oriented than domestic investors and;
foreign
investors
prefer
to
structure
simple
transactions.
Thesis Supervisor: James McKellar
Title:
Director, Center for Real Estate Development
3
TABLE OF CONTENTS
Acknowledgments..
Chapter One
Introduction .......................... 5
Chapter Two
Foreign Investment in the U.S.:
An Overview ......................... 20
Chapter Three
Chicago: An Overview ................. 30
Chapter Four
Perceptions and
Why Chicago?
Strategies .......................... 41
Chapter Five
Examples of Foreign Investment
In the Chicago Market ............... 69
Chapter Six
Are Foreign Investors in Chicago
Different than Domestic Investors?..87
Chapter Seven
Foreign Investment in Chicago:
outlook and Opportunities .......... 107
Bibliography.... ......................................
4
0 0 0 0 0 0 0 .131
Chapter 1
INTRODUCTION
PREFACE
Several
cities in
the United
States tend
to have
a
disproportionate share of foreign investment in real estate,
most notably major cities on
the Atlantic or Pacific coasts
New York,
Los Angeles,
such as
Francisco.
analyze
Washington, D.C.,
Few studies published
why
investment
some
than
differences in
cities
others
activity
the level
in
sphere
of
Chicago.
if
The
and the
one major city
interest
of
Secondarily,
a larger
determine
estate
significant
foreign investment
outside the
namely
investors,
this study attempts to
determine if
behave differently
This investigation is one
being conducted
concurrently
differences
foreign
focus of this study is to
foreign
these
study
investors in three U.S.
are
appears to fall
that
foreign investment
and the
more
and domestic investors
nature of
than their domestic counterparts.
of
there
in the Chicago market
foreign investors
part
attracted
the way that foreign
behave within these markets.
determine
to date have attempted to
have
and
and San
activity
between
in commercial
foreign and
to
real
domestic
markets: Chicago, Los Angeles, and
Washington D.C.
5
SUMMARY OF FINDINGS
exist among
Significant differences
foreign investors
currently active in
the United States, as is
domestic investors.
On one
national
cultural
the case with
level these differences reflect
traits.
Japanese
look
for
different types of investments than do Dutch investors.
For
example,
Japanese investors
suburban properties
are.
On
another
are
at this
level, foreign
a U.S.
significant
than any
Dutch investors
investors
differentiate
syndicator, a foreign
syndicator.
purchase
Just as a U.S. pension fund is
has different investment criteria
a foreign
willing to
time although
themselves by investor type.
different than
not
investors
These
pension fund
and preferences than does
differences
commonalities that
are
might be
more
used to
generalize the form of foreign investment.
The longer
foreign investors
are active in
U.S. real
estate, the more they appear to resemble domestic investors.
The
differences that
domestic
investors
initially arise
with
respect
location preference, and risk
time.
As
between
product
and
preference,
posture tend to diminish over
these differences diminish,
foreign and domestic parties
those
to
between foreign
transactions between
domestic
begin to more closely resemble
parties.
6
For
example,
Dutch
investors
Sources
U.S.
are willing
report that
real
to
when these
estate, they
properties.
This
not willing
were
in suburban
properties.
investors began
not
acquiring
interested in
is similar to the
investors today.
players in U.S.
invest
reluctance of Japanese
Japanese investors
have only
real estate since the early
to purchase properties
suburban
been major
1980's and are
in the suburbs
at this
time.
Foreign
exhibit a
Foreign
for downtown
properties often
perceived
of
all
nationalities
strong preference for downtown,
properties.
point
investors
by
entities
have a
and
"class A" office
cultural
office properties.
reference
Furthermore, these
command international recognition
foreign
concerns
to
types
be
less
and are
risky
than
alternative investments.
Some
price for
types of
foreign investors
are willing
some types of U.S.
real estate.
entities are able
historically
Not
to pay
real estate, but not
all properties sold
to command high prices.
commanded
a premium
higher
prices
for all
to' foreign
Those that have
are
downtown
and
landmark properties in major U.S.
cities that are both well
located and substantially leased.
Foreign entities will bid
lower
on other
types
of properties
culturally unfamiliar or which
greater risk.
Since there
with
which they
are
they perceive to represent a
is little documented evidence of
7
of residential, industrial,
foreign purchases
can assume that foreign
properties, one
less for
and suburban
entities would bid
properties are sold
such properties since
to the
"highest bidder."
In a
600,000
recent transaction in Chicago,
square
million, or
foot
downtown
$125 per square
recently agreed to purchase
over $250
per square foot
office
foot.
RREEF purchased a
building
A foreign
for
$75
investor has
a downtown Chicago property for
which may set the
precedent for
future investments in the market.
Foreign investors tend to
other
cultures, holding
than they are
are lower
have a longer-term view.
periods
are traditionally
in the United States and, as
turnover rates.
major
property
in
its
longer
a result, there
"Mitsubishi Estate
largest owner of real property is
In
Co., Japan's
said to have never sold a
50-year
history." 2
Furthermore,
foreign entities consider the United States a safe haven for
capital
this
and are
country
for
interested in
a
investing their
longer period
of
time
capital in
for
capital
preservation purposes.
Foreign investors tend to be more relationship-oriented
than domestic
investors.
relationships and
without the use of
They tend to
generally would
intermediaries.
8
establish long-term
prefer to
deal directly
However, since they are
unfamiliar with the United States and with the ways of doing
business,
like
they
intermediary
to
can
who
align themselves
aid
them
This is the
on-going relationship.
larger
after
time
domestic
with
the
firms tend
for
search
basis for what often
With the
domestic insurance
their
an
assistance in negotiating with
investments and provide them
domestic parties.
in
with
first
exception of some
companies, who
same
domestic
to be
is an
of the
often deal
real
estate
time
firms,
more transaction-oriented
than
foreign investors and do not depend heavily on relationships
with investment advisors.
Foreign
investors
transactions,
because
of the
familiar,
results
by
American
structures.
all-
all-cash
For
to
structure
standards, on
structures with
usually
are
tend
debt or
which they
purchases
are culturally
all-equity.
purchases and
example,
their
simpler
What
often
straightforward
"investment vehicles,
such
deal
as
limited or general partnerships, do not exist [in Japan] and
Japanese laws
concerning similar Japanese entities
are not
well developed... Real estate deals are almost never financed
on a non-recourse
basis and the concept
of the convertible
mortgage is unknown in the domestic context." 3
Chicago
investment and
is not
currently a
most foreign
this market have been active
9
first choice
for foreign
entities who have
invested in
in other markets in the United
pursuing
to
prior
States
opportunities
investment
in
Foreign investment (excluding Canadian investment)
Chicago.
metropolitan area
in the Chicago
office space
in existing
to roughly seven
of the decade amounts
since the beginning
percent of total office space in that metropolitan area.
In
51 percent
of
and
in
investment
Angeles, foreign
Los
in
space
office
comprises
central business
the
district,
Washington, D.C., foreign investment accounts for 12 percent
of the supply of office space.4, 5
Foreign investors are likely to
future to
in
this
invest in Chicago properties.
market tend
to
office
properties
in other
opportunities
saturated, as
become
prices in
trend of
in both
malls.
As
investment markets
these markets
continue to
U.S. real estate grow in
the Chicago market increases and,
as the Chicago market begins
current
regional
and
increase, as foreign portfolios of
the
buildings
of foreign investment
popular foreign
size, as familiarity with
Foreign investors
downtown office
favor
are examples
although there
suburban
be more willing in the
to show signs of recovery from
it
overbuilding,
is expected
that
foreign investment in this market will increase.
The
with
Japanese are
Chicago.
This
this
beginning to
indicates a
market.
purchases
in
announced
involving Japanese
feel more
comfortable
likely increase
In 1986,
investment
in their
projects
were
in Chicago.
One
two
involved
transaction
projects
additional
Japanese
debt
only.
have
been
Japanese are actively studying
that the
Foreign
also indicated
brokers have
and local
investment advisors
10
representing
identified
downtown Chicago.
in
direct investment
1987,
July,
As of
the Chicago market
and seeking investment opportunities in the Chicago area.
There
developers, management
lawyers
to
there are
Specifically,
market.
interface
with foreign
leasing
from
properties,
to
arrange
participate
in
joint
entities, to sell
in
foreign
Chicago area to generate fee
favorable
venture
foreign
of
owned
financing,
project
arrangements
properties, or to act
between domestic sellers and
for
brokers, and
interests
management
and
estate
opportunities
firms, leasing agents,
investment transactions in the
income
real
Chicago
foreign sources of capital in
professionals desiring to tap
this
for
opportunities
are
with
to
foreign
as an intermediary
foreign buyers of Chicago real
estate.
DEFINITIONS AND ASSUMPTIONS
Foreign direct
investment in this study
includes only
commercial property transactions in which the foreign entity
involved has an equity investment.
analysis, debt having the
assumed to
be an
For the purpose of this
characteristics of equity is also
equity investment (i.e.
11
participating or
convertible mortgages).
have historically been and
Although Canadian investors
development in
to
standing
affiliations
this
study
investors.
This
is
investments
are
but due
was
not a
to the
conducted,
that
to imply
not
limited time
have been
they
Canadian
equity
in the
Chicago
force
significant
firms.
American
non-North
on
focuses
long
their
estate
real
U.S.
with
Therefore,
study
real estate, their
well as
as
States,
the United
proximity
the length of
domestic firms due to
have been active in U.S.
time that they
virtually
are
firms
Canadian
that
indistinguishable from
market,
market, preliminary
the Chicago real estate
indicates
research
and
ownership
property
active in
quite
be
to
continue
which this
frame in
the
from
excluded
research and analysis.
METHODOLOGY AND ORGANIZATION
The analysis
uses
a case-study
on-site
whenever
transactions
Initially,
possible.
foreign
interviews,
on personal
approach based
involving
in Chicago
direct investment
of foreign
a
sample
entities that
of
have
26
taken
place in the Chicago market were identified through contacts
in the area.
After identifying these specific transactions,
American
and
transactions,
the
the
foreign
principals
intermediaries
12
involved
associated
in
these
with
both
parties to the deal, the prominent real estate professionals
real
on
estate
Over
length.
at
possible
national level
a
Chicago and in New York City
were
50 people
when
interviewed
were
contacted
in
Using
by phone and in person.
the relative level
and the related interviews,
these cases
involved in
level,and those
local, Chicago
on a
involved
and nature of foreign investment activity in Chicago as well
as the perceived differences
in foreign investment behavior
in the Chicago market were then deduced and analyzed.
As
background,
discusses foreign
Chapter
Two
summarizes
briefly
investment activity
and
in the
of all types
United States.
Chapter
Three introduces
economic, and
Chicago from
a real estate perspective,
and currently.
a demographic,
both historically
It discusses the attraction
of Chicago for
any investor, foreign or domestic, and compares Chicago with
other major cities in the country.
In addition
to summarizing general
foreign strategies
and objectives for U.S. real estate investment, Chapter Four
describes
the foreign
perception
specifically why certain foreign
of
the Chicago
market,
entities decided to invest
in this market.
After identifying
Chapter
Five
offers
general perceptions
summary
transactions that have been closed
13
and strategies,
descriptions
of
four
in Chicago over the past
several
are
transactions
presents
involved
have
fundamental
the
including
the
the parties
These
pending
the
of
diversity of
deals are
This
chapter
and
the
highlight
the
cases
four
transactions
over the
pending
property description,
currently being negotiated
been transacted
of
transactions
the
of
involved, the
descriptions
that have
aspects
structure.
deal
Three
discussed.
briefly
also
investors
foreign
types.
and
nationalities
different
and
that
years
past several
or that
years in
this market.
different
from
foreign
differences,
investors
Identifying
investors.
domestic
these
understanding
that
assume
often
Americans
when
they
occur,
are
and
are
important for U.S. real estate professionals seeking to work
investors.
with foreign
Different cultures
preferences for product types,
structures.
have different
geographic regions, and deal
Different cultures also behave differently with
respect to how they make decisions and what they are willing
to pay for U.S. real
estate.
Chapter Six addresses, from a
domestic perspective, how foreign investors are perceived to
be different from domestic investors in Chicago.
The final
the
current
chapter offers
foreign
analysis and
investment
trends
highlights
foreign investment
this city,
and speculates on the
14
activity
conclusions of
in
Chicago,
and projections
for
opportunities created for
real
foreign
to tap
this market
in
estate professionals
sources of capital.
LIMITATIONS OF THE RESEARCH
The field research was affected by severely constrained
of field sources to divulge
time limitations, the reticence
and
information
specific
provide
on
facts
particular
reliance on often broad and
transactions and, the continued
general opinions without the benefit of corroborating facts.
This paper was researched and produced over a two-month
period.
Unfortunately, with such a
limited time to cover a
broad subject, one can barely scratch the surface of foreign
size of Chicago.
Therefore, the
a starting point with
more fieldwork
investment in a market the
work must
be seen as
required as a basis for more definitive conclusions.
In
hard to
the
assemble because
this
data for
identifying
Chicago
the
From
Angeles.
property
area
methods
by
Washington,
in
outset,
owned
because of
essence protects
there
an
they
15
were
foreign
by
the anonymity
which
problem
not encountered by other researchers
investigations
similar
be a
to
This seemed
was
in gathering
of the difficulties
study.
endemic to Chicago and
in
limitation, information
the time
addition to
Illinois
and
D.C.
difficulties
entities
that
state law
of property owners
own
property.
in
Los
in
the
in
and the
Protecting
often
of foreign investors
obtain from the advisors
difficult to
was
information
Furthermore,
market.
Chicago
the
in
individuals
companies and
many
of
preoccupation
be a
transactions seems to
real estate
confidentiality of
because of the confidentiality of the fiduciary relationship
profile, and there
Beyond
deliberately
in Chicago
property
disguises
that no
clear reason
try
one
the owners
to keep
a
low
chain of intermediaries
is often a long
further
that
involved
Additionally,
clients.
estate professional suggested that
Chicago real
of
their
and
advisors
between
ownership
property.
of
apparent
for this
was given
obsession with anonymity.
solely
a
this
of
problem
difficulties in gathering data
by
excerpt
the following
also
because
Illinois limits
the
similar
encountered
in Chicago as is illustrated
from a
recent marketing
of the confidential nature
difficult because
not
prominent
A
office building transactions in
"Tracking major
and
researcher.
advisor has
investment
international
information was
access market
inability to
This
trust structure
the availability of
in
study.
Chicago is
of most deals
the
state
of
information concerning
6
building ownership."
Subsequent to
Chicago, there
involved
to
identifying foreign-owned
was often
divulge
reluctance on
specific
16
properties in
the part
information
of those
regarding
the
It was
transactions.
given
any
of
sides"
much
strategies
out
came
and
international
Whereas difficulties
some extent in the other markets
such as these did exist to
that they
exist to the extent
they did not
being studied,
with
of conversations
advisors representing foreign clients.
Therefore,
perspectives
foreign
on
information
the
of
offices.
many maintain U.S.
in the city nor do
foreign
not have offices
the Chicago market do
investors active in
the
of
Many
transaction.
with "both
to speak
also difficult
did in Chicago.
Limited information on foreign investment in Chicago is
also
partially
due
to
compared to other U.S. cities
and
such
investment
as
like New York, San Francisco,
In the
related studies
foreign investment activity in
the Los Angeles
and Washington,
Los Angeles,
that assess
of
the lack
Washington,
D.C.
D.C. markets,
27
involving
transactions
foreign equity investment were identified in the Los Angeles
central business district, which
of
space,7
and 70
such
has 28 million square feet
were identified
transactions
in
Washington, D.C.'s 58 million square foot CBD.8 In Chicago's
CBD, which has
transactions
19
were
over 95 million square feet
of space, there
involving
identified
foreign
investors.
In
many
transactions
instances,
with foreign
the
parties
investors
17
involved
were not
in
the
comfortable
giving
out information.
In comparison
to other
markets,
Chicago real estate professionals seem to be more guarded in
disclosing
market
professionals in
Whereas there
information.
the Chicago
market who were
and informative, there were equally
discuss specific transactions.
Chicago
market is
industry
relies
information.
the
surprising
so
heavily
A guarded climate
lower level
of interest
Chicago market.
18
many
were
very helpful
as many who declined to
This characterization of the
given that
on
the
the real
free
estate
exchange
of
could account, in part, for
by foreign
investors in
the
Chapter One
Endnotes
1 Jones
Lang Wooten Investment Research, The Downtown
Chicago Office Market Report, (November 1986), 18.
2 Arthur
Mitchell, "Remarks Before the Japan Society
Conference on Japanese Investment in U.S. Real Estate," (2
October 1986), 3.
3
Ibid, 3.
4 Michael Smith and Kevin Whalen, "Japanese Investors in
United States Real Estate: Are They Really Different. A
Review of Activity in the Los Angeles Area" (M.S. thesis,
Massachusetts Institute of Technology, 1987).
S. John Hodge and S. Kent Roberts, "An Assessment of
Foreign Investors in the Washington, D.C. Real Estate
Market" (M.S. thesis, Massachusetts Institute of Technology,
1987).
6 Jones
Lang Wooten Investment Research, The Downtown
Chicago Office Market Report, (November 1986).
7 Smith
and Whalen.
5 Hodge
and Roberts.
19
Chapter Two
AN OVERVIEW OF FOREIGN INVESTMENT IN THE U.S.
FOREIGN INVESTMENT IN THE UNITED STATES
been
has
There
the
past
exceeded the previous year's investment.
in
in this country and
mortgage related
The
U.S.
Commerce
of
billion
$750.9
invested
of
total
include investments
stocks
deposits in
securities, and
Department
entities
such as
assets
financial
various
Portfolio
75 percent
approximately
represent
foreign investment
Foreign investment
investment.
direct
or
investment
investments
has
is traditionally categorized as either
in the United States
portfolio
investment
foreign
annual
years,
several
year over
Each
United States.
in the
investment activity
foreign
of
amount
increasing
an
and
bonds,
U.S.
banks.
foreign
estimates that
in
portfolio
U.S.
investments in 1985.1
According
nearly 52
to
U.S.
percent of
Commerce
Department
statistics,
foreign portfolio investments
in the
United States are made by the western Europeans, the largest
source of
Ranked
second
investments
investments in
foreign portfolio
in
largest
1985
dollar
in
are
the
volume
Japanese.
this country. 2
of
Sean
portfolio
Burns,
a
Forecasting and Policy Analysis
research economist with the
20
Division of the National
"The
Association of Realtors, explains,
represents
25 cents
investment in the United
States." 3 Exhibit 1 identifies the
investment according
portfolio
foreign portfolio
dollar in
of every
This
$30.5 billion.
alone is
Japanese contribution
nationality of
to the
the
investor.
The other general classification of foreign investment,
contributing 25
the United
defined as
foreign investment in
States, is direct investment. 4
Commerce
U.S.
percent to the total
foreign direct
Department,
investment
entity of 10 percent or more
is
a foreign
indirect ownership by
"the direct or
incorporated business
According to the
of the voting securities of an
enterprise, and a 10
percent or more
interest in real property." 5
Foreign direct investment is
to
nature
the
of
reporting requirements
in
the
United
For example, investments are often reported at book
States.
value which disguises the
and
difficult to estimate due
other
estimates
market value of these investments
rely on
information
from
published
articles.
1985
Commerce
Department
estimates
billion to foreign direct investment
increase from
amount
of
1984 investments.6
foreign
nationality of the investor.
21
$183
in 1985, an 11 percent
Exhibit 2
investment
direct
attribute
identifies the
according
to
the
FOREIGN INVESTMENT IN U.S. REAL ESTATE
Based on U.S.
Commerce
the
United
U.S.
Using
direct
foreign
billion) represent
direct
foreign
1985
According to estimates from Salomon
compared to domestic investment in U.S. real
investment accounts for "slightly
estate, foreign
percent of the
total
of
percent
investments in the U.S.
Brothers, Inc.,
estate ($18.6
U.S. real
10
approximately
estate. 7
1985
estimates,8
Department
investments in
real
U.S.
of
worth
billion
nationalities purchased
of all types and
foreign investors
$3.5
Commerce Department statistics, in 1980,
real estate in
total value of all developed
States.
the
Hence,
investment in U.S. real estate
impact of
foreign
is still relatively small in
size of the market." 9 Amounting
comparison with the overall
to $18.6 billion in 1985,
total
over one
direct foreign investment in real
of the
total
foreign investment in the United States in this year.
Total
estate
represents approximately
two percent
invested in
includes the $750.9 billion
foreign investment
portfolio instruments and the $183 billion directly invested
by foreign entities in the United States in 1985.
Of all of
the
United States,
Netherlands
investors
have invested
basis as Exhibit
own property in
the foreign investors who
the
3 illustrates.
22
from Great
Britain and
most capital
In the
on an
the
annual
past several years
have increased
the Japanese
has
Much
dramatically.10
their investments in
the U.S.
about
Japanese
written
been
investment in the past twelve months, and their acquisitions
of highly visible properties have drawn much press coverage.
real
the
estate until
and the
investors
Japanese
prominent actors
are
1980's and
the
beginning of
have
Judging from the number
approached this country cautiously.
of transactions
players in U.S.
investors were not major
However, Japanese
their purchases,
dollar amount of
becoming
definitely
increasingly
Japanese
estate market.
in the U.S. real
have at least doubled from
investments in the United States
1985 to 1986, and it is estimated that the Japanese invested
between $2.5 and
investment is
Japanese
during
which
an
purchase
properties.12
estate in 1986.11
$3 billion in U.S. real
time
expected to
Exhibit 4
to
$5
additional
are
investors
Japanese
$6
illustrates
in 1987,
double again
expected
in
billion
to
U.S.
annual Japanese
real
estate investment in the United States since 1980.
Although
much
is important to
Japanese, it
remember that they
investment
investment
has yet
investors.
In
one
billion
and
in total
to surpass
dollar
that of
1985, Japanese investment
dollars.
volume,
are still
Japanese
English and
Dutch
slightly exceeded
English investments
23
the
Furthermore, in
new players in the U.S. real estate market.
annual
on
focused
attention has
recent
in
U.S.
real
totaled
$2.3 billion
according to
Japanese
investment in U.S.
the
compares
properties
U.S.
in
1980 and
investor in
of the
the nationality
the
making
year,
Exhibit 5
investment
foreign
English in
and the
this
year.14
given
in a
of
percentage
that
largest source of foreign
Japanese, the
estate
However,
the Dutch
property
U.S.
of
acquisitions
same period.13
indicate
1986
for
surpass both
investors will
real
during this
estimates
preliminary
while Dutch investment
$4.6 billion in 1985
estate totaled
1986.
WHAT
MAKES
REAL
ESTATE
AN
ATTRACTIVE
INVESTMENT
FOR
FOREIGNERS?
There
are
articles
published
numerous
reports
and
speculating why U.S. real estate is an attractive investment
for
consistently
Reasons
foreigners.
in
cited
these
articles include: 1 5
*Exchange
A
Rate Differentials.
dollar,
weak U.S.
compared to foreign currencies, increases foreign purchasing
power
enabling
investors to
get
more
product for
their
currency.
*Lack
countries,
England,
of Domestic
Investment Opportunities.
including Japan,
have
opportunities.
few
This is
The Netherlands,
domestic
caused
24
real
by
estate
Foreign
Germany, and
investment
the unavailability
of
of developable land.
product and the scarcity
foreign
in
owners
property
reasons,
for
rate
turnover
the
result,
a
As
States.
hold
countries
time than is common in the
properties for longer periods of
United
For cultural
investment grade properties is low in foreign countries thus
limiting investment opportunities.
rate
This reduced
Japan.
with the
foreign countries,
than many
rates
lower tax
States offers
The United
*Tax Advantages.
exception of
returns,
increase overall
can
however measured, in U.S. real estate investments.
In many
*Higher Yields.
States,
owners
of real
between 8 percent and 10
the
United
often capture
yields
real estate.
U.S.
in
investment
equity
yields derived from
investments are lower than
real estate
yields on
foreign countries
estate
can
In
According to analysts at
percent.
Jones Lang Wooten, yields in London average between 4 to 5.5
in
percent,
Frankfort 5
of
those
6
the Netherlands
to
in
home
markets
would
in
in excess
percent.16 Clearly, sustained yields
found
and
6.75 percent,
attract
foreign
investors.
currently
exports
foreigners U.S.
with
desire
the lack
Deficit.
States Trade
*The United
more
than
dollars to spend.
imports
Trade
United States
which
capital
25
gives
surpluses coupled
investment opportunity
of domestic
to preserve
it
The
encourages foreign
and the
investment
year
[1986] Japan
Brothers, "Last
trade surplus
$51 billion
registered a
Mitchell, a
to Arthur
firm Coudert
York law
the New
partner in
According
countries.
outside their
with the United States alone." 17
Political and
*The
States.
foreign
by
political and
capitalistic world; it is as a
havens in the
United
of the
considered
is
the safest
among
to be
investors
States
United
The
Economic Stability
economic
safe place to
invest and preserve capital for the long term.
*Portfolio
Diversification.
Investment in
real
U.S.
estate is often used as a portfolio diversification strategy
for foreign investors for many of the same reasons appealing
investors.
domestic
market, the
investment
markets
size
The
largest in the
of the
free world, and the
opportunities available
provide
ample
U.S.
real
estate
variety of
within individual
diversification
alternatives
foreign and domestic investors.
*Globalization of the world's financial Markets.
the world's
of the merger of
This consists
global
single
a
into
financial and capital markets
of
rates
Differential
market...
capital
in
differences
plus
nations,
deregulation in major
have
markets
financial
their
the initial traits of
created large discontinuities and anomalies in the
These
markets.
these
merging
of
process
arbitrage
many
generating
are
discontinuities
of foreign
recent flow
The
possibilities...
of such
part
is
estate
real
int? 8 U.S.
capital
arbitraging.
26
U.S.
for
From the statistics, it appears that foreign investment
of all kinds in the U.S. is significant in dollar amount and
is increasing in volume
overall size of the U.S.
in
investment
percent.
Foreign
component of
and
real
of total
annually.
However, relative to the
real estate market, foreign direct
accounts
estate
for
investment in Chicago is
total foreign investment in
foreign
investment in
less
one
an even smaller
the United States
real estate.
specifically analyzing foreign investment
than
Before
in Chicago, it is
fundamentals of this market and
necessary to understand the
its attraction to investors.
27
Chapter Two
Endnotes
1 Sean
Burns, "The Contribution of Foreign Portfolio and
Direct Investment to the U.S. Housing Market in 1986,"
(January 1987).
2
Ibid.
3
Sean Burns, "An International Role for U.S. Real
Estate," Real Estate Today, 20, (June/July 1987), 20.
4 Burns,
"The Contribution of Foreign Portfolio and
Direct Investment to the U.S. Housing Market in 1986."
5 Ibid.
6
Ibid.
7 John
Magazine,
E. Tsui, "Japan: The Land Rush,"
(June 1987), 33.
Development
8 Burns.
"The Contribution of Foreign Portfolio and
Direct Investment to the U.S. Housing Market."
9 Anthony
Real Estate
Downs, "Foreign Capital in U.S.
Markets," Salomon Brothers, Inc., (April 1987), 4.
10
Tsui, "Japan: The Land Rush."
1 1 David
Ibata, "Japanese Buy Into Downtown," Chicago
Tribune, 4 February 1987.
1 2 Real
Estate Forum, (May 1987), 42, "The Japanese and
Their 'Yen' for United States Real Estate."
1 3 Peter
R. DeWitt, "Foreign Direct Investment In U.S.
Real Estate," Real Estate Review, 16, (Winter 1987), 69.
14Tsui,
"Japan: The Land Rush."
15Downs, "Foreign Capital in U.S.
1 6 Jones
Real Estate."
Lang Wooten, "International Property Review:
1987."
28
1 7 Arthur
Mitchell, "Is the Japanese Market a Level
3.
Playing Field," (11 May 1987),
1 8 Downs,
Markets,"
"Foreign Capital in U.S.
2.
29
Real Estate
Chapter Three
CHICAGO: AN OVERVIEW
Chicago is
Chicago is remembered for such
"The City of Big Shoulders."
the
as
things
building
-
Chicago
1871
the Sears
Tower,
the
Fire,
airport
Al
1987 when
Prior to
being
of
the distinction
had
gangster
that of Chicago's, O'Hare
Atlanta's airport volume exceeded
International
tallest
world's
antics of
the
"signature" architecture.
Capone, and
City" and
as the "Windy
often referred to
the
busiest airport in the world.
is
There
far
officially became a
more
to Chicago
Chicago
this.
than
and its economy
city on March 4, 1837,
has substantially grown and changed in its 150 year history.
and has
Chicago is
center
financial
States.
As
the
early as the
founded adding
city.2 The volume
of Trade
reached a
than the
exchanges -
commercial and
time the
the
United
1850's, Chicago was known
as the
of
midwest region
transportation in
nanufacturing and
nation's midsection.
Trade was
more
for
center for
commercial
the
been for some
In
Chicago Board
1849, the
a new aspect
of commerce
combined volume
1985.
of the
to the
the Chicago Board
of contracts traded on
record high in
of
This
volume was
next three
the Chicago Mercantile Exchange,
futures
the Commodity
3
Exchange of New York, and the New York Mercantile Exchange.
30
Chicago is also home to
the Midwest Stock Exchange which is
4
the second largest stock exchange in the nation.
CHICAGO DEMOGRAPHICS AND SIZE
Following New York, whose 1985 population was estimated
at
million
at 8.1
estimated
States with
population
year, Chicago
same
in this
largest metropolitan
the third
ranked
whose
Los Angeles,
and
million,
8.4
area in
an estimated 7.3 residents
was
is
the United
in 1985.5 According
to an analyst at Landaur and Associates, although it is less
than
2 percent
from the
migration
population
outpaced that of
to the
"rust belt"
in
growth
affected
year and
per
last
the
by the
tremendous
sunbelt, Chicago's
decade
all major cities in the
[1970-1982]
has
north and central
regions of the United States.
Chicago is
square
situated on Lake Michigan
approximately
miles.6 Since
undeveloped, future
and covers 4,654
half of
expansion of the area
this land
is
has few physical
limitations other than Lake Michigan to the east.
According to census data,
is 29.8
years.
years, younger
the median age of Chicagoans
than the
national average
of 30.3
household income in the city of
In 1985, the median
Chicago was estimated from census data to be $19,667.7
31
CHICAGO'S CHANGING ECONOMY
As
in many
northern urban
rested
Chicago's economy
century,
in
However,
industry.
areas at
of
many
of the
the turn
and
upon manufacturing
these
Chicago
cities,
included, the economic groundwork has shifted to the service
industries over the past decade.
More than a century ago, Chicago was perhaps best known
for its
shipping services.
located
in
the
center
Having the advantage
of
point linking
distribution
the nation,
the
city
East to
the
West.
the
transportation hub, Chicago has
network
of
Investment
transportation
Research
of being
a
As
a
always prided itself on its
facilities.
of Jones
division
transport products across the
was
According
Lang
to
the
Wooten,
"to
continent, the city possesses
a network of airports, railroads, waterways, and expressways
that carry more passengers and cargo annually than any other
location in North or South America." 8
Well
before the
turn of
the century,
Chicago became
known for industries such as meatpacking, manufacturing, and
steel making.
as well
Chicago was also a metropolis for agriculture
as the center
for agricultural machinery.9
1960's, Chicago's economic base
such
as
metals,
electric
By the
was comprised of industries
machinery,
food
processing,
nonelectrical machinery, fabricated metal products, chemical
and allied products, and printing and publishing.10 In 1987,
32
ranked
be
to
continues
Chicago
gross
in
one
number
manufacturing sales in the nation.1 1
Chicago has experienced a dramatic
In the last decade,
Both the steel-making industry
loss of manufacturing jobs.
"The metropolitan area has lost
experienced troubled times.
jobs since 1984,
28,100 manufacturing
this
the Midwest have
surrounding agricultural farms in
and the
with
in
gains
but has made
and
sector
the whosesale/retail
up for
in
service employment."12 During this same time period, service
employment
sector
increased.
in
the Chicago
metropolitan
sector currently provides 75%
This
area
has
of all jobs
in Chicago according to estimates by Landaur and Associates.
economy is expected to continue
Although this sector of the
to grow, this growth rate is diminishing slightly. 1 3
one which
that
becoming
based on manufacturing
was traditionally
now is
primarily a
known as
better
transformed from
economy been
has Chicago's
Not only
Chicago is
service center,
an
to one
international
city and
also
has
recently been aggressively marketing itself to international
firms.14 In addition to being
home to almost 80 Fortune 500
companies,15 it is estimated by an analyst at Collins Tuttle
now home to nearly 90 of
that Chicago is
in the
world.
Jones Lang Wooten's
the top 100 banks
Downtown Chicago Office
Market Report indicates that:
"The city's
financial sector is based
33
on banking
and trade and has been rapidly expanding its
Commercial bank deposits
international scope.
[1985] to
rose 13.8 percent over the past year
one
Chicago
reach more than $11.0 billion, making
world...In
the
in
of the largest banking centers
turn, many foreign banks have opened branches in
of Japanese financial
The presence
Chicago.
institutions is most pronounced with 16 branches
in Chicago, followed by Canada with 8, France with
7, Italy with 616 Great Britain with 5 and West
Germany with 4."1
With global banking an
to take
situated
emerging trend, Chicago is well
advantage of
financial services
expand its
and to
these opportunities
region.
to the
Considering
its broad and diverse economy and its wide financial, trade,
and manufacturing base, Chicago provides a good location for
both domestic
and international
firms.
to Neil
According
Bluhm, president of JMB Realty, "Chicago has become a magnet
for
foreign
companies...The
city
with
dealing
is
an
increasingly sophisticated marketplace." 17
In
addition
is
Chicago
activity.
sales
and
also
to
finance,
nationally
trade,
and
recognized
manufacturing,
for
its
retail
In 1985, Chicago recorded $41.7 million in retail
was
ranked
recorded retail sales
second
behind
Los
Angeles,
of $51 million and ahead
of New York
18
City, with retail sales valued at $41.4 million.
34
with
THE REAL ESTATE MARKET IN CHICAGO
sources close
to
According
to
the
of the first half of 1987,
At the end
Chicago during 1986.
13
was constructed in
of new office space
million square feet
market, over
the total office supply in the Chicago metropolitan area was
area the
metropolitan
feet,
square
million
160.5
near
New York and Los
office markets
contain 429 and
space respectively.19
office market
third largest
country behind
Chicago
in the
Angeles whose metropolitan
282 million square
According to the
feet of
Chicago Association
indicate the total value of
of Commerce and Industry, "data
real estate was more
the Chicago area's
the
making
than $200 billion,
trailing only Los Angeles and New York."
According to
market, vacancy
Chicago
percent in
percent.
below
the
"The
average
the vacancy
with the
reaching almost
the
past
rate over this
trends experienced
20
has remained
vacancy rate
over
12
suburbs, the
In the Chicago
downtown Chicago
in the
close to
are averaging
substantially higher,
national
fluctuations in
very well
rates
downtown Chicago.
rate is
vacancy
professionals active
real estate
decade
and
period compare
by most
other U.S.
cities."20 With the amount of current construction activity,
national and local real estate analysts expect vacancy rates
as more projects are completed.
to continue to rise further
Exhibit 6
illustrates vacancy trends in
35
the Chicago office
market.
Real estate brokers and analysts in Chicago report that
asking rents in downtown Chicago range from $24.00 to $30.00
foot, net of
per square
$45.00
Rents in
Chicago.
Effective net rents
this
unusual in
this is
approximate those
D.C.
Washington,
market.
asking
D.C. was
Washington,
in
foot although
per square
Rents in
be $50.00 per square foot and
New York City are reported to
One project
compares to
Angeles.
$22.00 to $25.00 in Los
asking rents of
increasing.
This
office space.
class A
newly constructed
expenses, for
taxes and operating
of
in Chicago's central business
district generally average $16.00 to $18.00 per square foot,
a 20 to
other
overbuilt
markets
Associates, "the
include as
$35.00
much as 2
per
square
standard, and
across
According
concessions are common.
and
of the quoted rents.21
30 percent reduction
years free
foot tenant
United
States,
to an analyst at Landaur
concession
lease
buyout of
the
As in
package today
rent on a
build-out
an existing
can
10-year lease,
above
lease, or
building
other cash
payment to tenant."
Industry
office space
the
be close to 2.5
in Chicago to
feet per year.22
MIT, America's
estimate
professionals
Acording to a study
absorption
million square
recently conducted at
Office Needs 1985-1995, it
will require 4.3
23
years to absorb the vacant space in the Chicago market.
36
of
According to a report jointly published by the Center
area.
Urban
for
Department of Planning, Downtown
excess
the last five years,
Chicago 1985-1986, during
Development:
of
square feet
million
20
Northwestern
at
Research
Policy
and
Affairs
University and the Chicago
in
Chicago
in the
been brisk
activity has
Construction
and
new
both
of
According to this
renovated space was completed in Chicago.
same report, there are currently nine million square feet of
billion
renovation
within
a
inventory,
148
in
invested
was
"during
and
construction,
under
space
downtown." 2 4
growing
illustrates
7
Exhibit
renovation,
and
construction
or
be) completed
about to
were (or
projects that
re-use,
adaptive
new,
$2.2
1985-1986,
and
absorption
vacancy trends in the Chicago downtown market since 1984.
market study conducted by Jones
According to an office
Lang
metropolis,
well
over a
lies at
has been
and
agricultural and
American Midwest.
the
goods
it
largest
third
a
urban
country.
For
transfer point
for
as
the
of the
the cross-roads
century,
transcontinental
industrial,
America's
"Chicago,
Wooten,
travelers,
as
well
transportation center
of the
It has also become, in more recent years,
country's leading
center
for finance
and trading
in
25
Midwestern commodities."
From a
real estate investment perspective,
37
Chicago is
United States, it is the
country, it
is ranked
third largest office market in the
exchanges.
There is
manufacturing sales,
first in gross
has active stock
retail sales and
second in
city in the
It is the third largest
an attractive market.
financial presence
a major
also
and commodity
in
Chicago.
markets in the United States,
As are other real estate
Chicago is overbuilt and vacancy rates are expected to climb
in
further
the
years
With
come.
to
few
physical
or
artificial restraints on the supply of space, the market has
the potential to become more overbuilt than it currently is.
According
initially
to real
assimilate
demographic, economic,
estate advisors,
and
thoroughly
and real
foreign investors
examine
estate trends in
prior to any site specific investment analysis.
preliminary analysis may indicate
these factors
and determine
investors enter this market.
38
a market
Whereas the
that Chicago is a healthy
and attractive market for investment,
beyond
fundamental
it is necessary to go
on what
basis foreign
Chapter Three
Endnotes
1 Kenan
Heise, "Chicago: A History of Its Business,"
Commerce, 84, (April 1987).
2
Ibid, 18.
3
"Chicago Board of Trade: History Made during Another
Year for CBOT," Commerce, 84, (April 1987), 77.
4 Jones
Lang Wooten Investment Research, "The Downtown
Office Market Report," (November 1986), 7.
5 The Chicago Association of Commerce and Industry,
"The New Chicago."
6 The
Chicago Association of Commerce and Industry, "Why
Locate in Chicago?"
7 Landaur
8 Jones
9
and Associates.
Lang Wooten Investment Research, 1.
Heise, 20.
10Heise, "Chicago: A History of Its Business,"
26.
1 1 The
Chicago Association of Commerce and Industry,
"The New Chicago."
1 2 Jones
Lang Wooten Investment Research, 3.
1 3 Coulter,
Coomece,
"Metropolitan Chicago Economy in 1987,"
(December 1986), 18.
1 4 Hal
Land,
45,
15
Jensen, "Chicago's International Flavor," Urban
(October 1986).
Ibid.
1 6 Jones
Lang Wooten Investment Research, 6.
1 7 Jensen,
"Chicago's International Flavor."
39
1 8 The
Chicago Association of Commerce and Industry,
"The New Chicago."
1 9 The
Urban Land Institute, Development Trends 1987,
(1987).
2 0 Jones
2 1
22
Lang Wooten Investment Research, 14.
Ibid, 17.
Ibid.
2 3 The
Urban Land Institute, Development Trends 1987,
(1987).
2 4 Mary
K. Ludgin and Louis H. Masotti, Downtown
Development (Chicago: Center for Urban Affairs, Northwestern
University and The Department of Planning, City of Chicago,
1986),
xvii.
2 5 Jones
Lang Wooten Investment Research, 1.
40
Chapter Four
WHY CHICAGO?
PERCEPTIONS AND STRATEGIES
WHY THE U.S.?
Deciding to invest in Chicago
strategy to
invest in
mentioned in
is one part of a broader
the United
States.
As
was briefly
Chapter Two, there are
several macro-economic
reasons why foreign investors choose
to place large sums of
capital, which
totaled $18.4
billion in 1985
Commerce Department statistics,
To summarize, these
foreign investment
(1)
the
diverse
disparities,
foreign
obtained
(3) the
real estate
by
in U.S real estate.
macro-economic factors influencing
activity in
U.S.
the United
economy,
lack of
in
and
(6) the
the
estate
rate
diversity
market which presents opportunities
in
yields often
compared
to
in other countries,
(5)
and economic stability of
size and
exchange
the higher
U.S. real
alternative real estate investments
the political
(2)
States include:
investment opportunities
markets, (4)
investing
according to
the United States,
of the
U.S. real
estate
to foreign investors to
satisfy their portfolio diversification objectives.
The
importance of
these various
investment in U.S. real estate
the nationality of
reasons for
varies not only according to
the investor, but also
41
foreign
according to the
investor type.
make
U.S.
Beyond
real
these macro-economic conditions that
estate
investment
appealing
to
foreign
investors, there are a multitude of investment opportunities
in the
United States from
fundamental
decision that
contemplate
is: In
which investors must
these
choose.
off-shore investors
what city
should this
several
international
A
must
investment take
place?
WHY CHICAGO?
According
advisors,
United
to
foreign
investors
States carefully
initially
regions prior
to targeting
kind of
investors try to
before
analysis because
pursuing specific
foreign
given the
investment
investments.
capital, there
seem to be
more than
market facts
these advisors feel that foreign
overall
of U.S. real estate is
for investment.
do not seem to bear
get an overall feel for
formulating
entire
making comparisons
certain cities
influence where to invest,
the
estate
and major cities within these
Although current patterns of investment
out this
study
and cautiously
between the different regions
real
the United States
strategies
Given that
and
the acquisition
an attractive investment vehicle for
are clearly
some U.S.
cities that
more appealing to foreign
investors than others
large amount of investment
activity generated in
these cities.
For example,
42
rough estimates
indicate that
foreign
equity
investment
of
the
central business district,
in the Los Angeles
office space
percent
represents 51
investment represents 12 percent of
and that foreign equity
central business district. 2' 3 ' Exhibit
the Washington, D.C.
8 identifies the regions of the United States that have been
primary investment choices for foreign investors.
foreign investment has
Until recently,
that
bi-coastal;
is,
concentrated in
been primarily
major
areas on both coasts of the United States.
metropolitan
The author knows
of no studies to date that have determined the dollar amount
of foreign
investment in Chicago
compiled a list of
in
this
that have
transactions involving foreign investors
market.
Rough
estimates
Association of Commerce and
investment in Chicago
million) of the
or any studies
from
the
Chicago
Industry speculate that foreign
could be as much as
$6 billion in total 1985
15 percent ($900
investment in new
buildings.
Using the property data gathered for this study-, out of
160.5 million
metropolitan
square feet
area,
of office
almost
space in
million
11
the Chicago
square
feet,
or
slightly over seven percent, of existing office property can
be attributed to foreign
central
equity investment.
there
business district,
investment
in
approximately
supply of office space.
These
43
is
In the Chicago
evidence of
10 percent
of
the
foreign
existing
are very crude estimates due
to
limitations of
the time
the study
and to
the limited
amount of data that was available because of the limitations
discussed
in
Chapter
statistically verify
estimates would
included.
One.
attempt
made
no doubt these
was not available for
In such cases, an
was substituted for the
to
investment had been
be greater if Canadian
projects identified.
was
There is
the results.
Square footage
square feet
No
all of the
average of 500,000
actual square footage.
Furthermore, the estimate does not reflect partial interests
retained by domestic joint venture partners since most often
the percentage of partial interests was not known.
The
absolute
significant as
accuracy
of
the
number
its relative importance.
is
not
as
Whereas estimates
indicate that foreign investment in the Chicago metropolitan
area
is
less than
that
in
Washington,
D.C. or
in
Los
Angeles, these estimates do indicate the presence of foreign
investors in
the Chicago
market.
There
is no
doubt that
there are additional properties owned wholly or partially by
foreign investors that have been overlooked.
There
investment.
are
It
additional
is very
problems in
estimating
difficult to track
equity
capital flows.
Although on the surface, there appears to be a prevalence of
transactions involving all-cash
is
no
way
to
financed either
determine if
purchases in Chicago, there
these
properties
have
overseas or domestically subsequent
44
been
to the
initial investment.
According
to
those
interviewed,
choose to invest in Chicago
reasons that they
reasons
Chicago's
attractive investment
investors
properties for many of the same
choose to invest in
include
foreign
size,
other cities.
its
economy,
opportunities, the same
These
and
its
factors that
influence domestic investors.
The
cities,
Size
of
Chicago
the
is
Market.
ranked
Compared
third
largest
population.4 Downtown Chicago's office
largest in the United States,
to
other
in
U.S.
terms
of
market is the second
having 95 million square feet
of space.5 Since the majority of foreign investment has been
limited to the largest cities in the United States, it seems
that the
size of a
investors.
city holds some importance
However,
illustrated
as
by Exhibit
statistics
9,
for foreign
indicate,
even though
and
Chicago is
as
ranked
third in size, Chicago does not appear to be ranked third in
appeal to foreign investors.
Saturation
of
foreign investors
to be
Alternative
As a
the coasts,
properties
industry
in these
believe
that
45
invest in
investment activity on
prices of and competition
have increased
to
there appear
motivating foreigners to
result of the recent
analysts
According
and international advisors,
economic reasons
Chicago.
Markets.
for prime commercial
markets.
these
Real
markets
estate
are
now
becoming saturated
as well
as expensive.
Chicago,
on the
other hand, offers foreign investors opportunities to invest
in U.S. real estate at lower absolute prices per square foot
than they would pay in Los Angeles, New York, or Washington,
their current favorites.
D.C.,
A recent study of
Chicago's office market conducted by
Jones Lang Wooten Investment
buildings
at prices
Research reports that "Quality
averaging
between $100
and $150
per
square foot are beginning to attract foreign capital seeking
stable, long-term investments that
buy' when
compared to
many regard as a 'better
similar buildings in
Manhattan that
have been selling for more than twice as much." 6
Japanese
purchase
two
investors
are
downtown
office
currently
buildings
"Building Number One" was completed
is
selling
for
"Building Number
slightly
Two" was
Japanese investor has
foot
for a
almost $270
over
negotiating
$130
per
completed one
interest in
per square foot,
Chicago.
in the early 1980's and
square
year ago
agreed to pay almost
50 percent
in
to
foot.
and the
$270 per square
the project.
this seems cheap
Even at
compared to
sales prices that generally fall into the $300 to $500 range
in both
there
Washington, D.C.
is not
and Los
enough sales
patterns in this market.
Angeles.
data to
Unfortunately,
determine sales
price
However, foreign investors appear
willing to pay a broad range of prices for properties in the
46
market.
Diverse Economy.
In addition
to the size
of Chicago
and the recent sales prices of property in the market, which
are
assumed
alternative
to
be
less
investment
expensive
in
comparison
opportunities
in
other
to
cities,
foreign investors invest in Chicago because of its broad and
diverse economy.
a diverse and
As mentioned in Chapter Three, Chicago has
mixed economy.
Many real
estate investors,
domestic and foreign, have felt
the recent sting from their
investments
towns, such
Houston,
in single-industry
where
vacancy
rates
depression in the oil industry.
Forum
article,
Daniele
have
Properties
Group,
institutions
invested in
what
soared
due
to
and
the
In a May, 1987, Real Estate
Bodini,
Continental
as Denver
president
of
reports
American
"Many
they considered
major
to be
the
'blue chip' properties in the sunbelt cities only to see the
asset value of their buildings drop considerably."7
Established
international
foreign
International
firms
interest
with
in the
Three,
there is
a growing
city's
economy
due
in
Presence.
offices
area.
in
As
The
Chicago
international component
part
to
the
demand
for
additional
increased foreign recognition of
47
growth
Chapter
to the
in
the
This produces a
office
the city.
of
indicates
mentioned in
international banking and services sectors.
corresponding
number
space
and
Deregulation of
banking
systems
around the
world
emerging global banking system.
to compete with domestic banks
has
contributed to
an
This enables foreign banks
in the provision of services
to domestic clients.
Although the
offices
in
Chicago
indicates that
with
property in
have offices in
the area.
foreign investors
who own
real estate operations
or Los Angeles, where
they currently
actively pursuing acquisitions, if they
The presence of
directly related to investment activity
It does
standpoint,
to
activity to
justify the
international
research
estate companies
the United States at all.
offices seems to be
of
no foreign real
Most
that have
preliminary
Chicago base their U.S.
New York City
Chicago.
international firms
increasing,
Chicago.
own property or are
in
is
there are
offices in
out of
number of
staff
not
an
make sense,
office unless
expense.
investment
from an
there
is
Furthermore,
advisors
are
not
economic
enough
offices of
prevalent
in
According to these advisors in New York City, many
these
expanding
indication
firms
their
of
are
establishing,
Chicago
increasing
branches
re-establishing,
which
is
foreign investment
a
or
possible
interest
in
Chicago.
Product.
high
Foreign investors have a noted preference for
profile, "signature"
thought to
products.
be well-located and having
48
These are
buildings
notable architecture
or other features.
involved what
local and national real
consider prestige
being "high
of
new
Many of the transactions in Chicago have
and landmark properties.
construction,
are
leased to
transactions,
requirement
as a
overbuilt.
also
credit
development
U.S.
In
profile", these properties, with
substantially
many
estate professionals
there
including
Recent development
investors have
is
what foreigners
often
Chicago,
projects
the case
a
not
of
preleasing
are
to which
as
becoming
foreign
minimum pre-leasing
Therefore, the availability of
consider to be
contributes to the amount
In
than
foreign involvement
contributed equity have
requirements of 30 percent.
the exception
often
tenants.
prerequisite for
markets,
more
addition to
investment-grade properties
of foreign investment activity in
Chicago.
Familiarity.
Prior to
must not only be familiar
market.
Recognition
investment, foreign
with, but also comfortable with a
becomes
an
foreign investment when domestic
to investment.
by
important
the
countries also have
Ministry
of
component
of
approval is required prior
In Japan, all investments
insurance companies, trust banks,
approved
investors
by Japanese life
and pension funds must be
Finance.
Other
foreign
various domestic approval requirements.
Foreign pension fund investments usually need to be ratified
by
a board
of
directors.
Disparities
49
in
the amount
of
properties owned
may
be the
by different foreign investors
result
of some
familiar with Chicago.
foreign
in Chicago
countries being
more
English, Dutch, and German investors
have had a presence in the Chicago market since prior to the
beginning of the decade.
Japanese investors, however, have
only been publicly active in Chicago since 1986.
Personal
Networks.
transactions
with
investors enter
Various
in
Chicago,
Chicago on
the basis of
relationships and
and new
Investors are
foreign investors
in
often
together.
market through
directly and
bring domestic
brokers
sellers,
(2) international
investment bankers,
acting
on
behalf
advisors
(4) lawyers,
of
both
both
indirectly.
sellers
Intermediaries that
transactions in Chicago include:
national
foreign
introduced to Chicago and
this
relationships,
intermediaries
involved in
involved
investors in
investment opportunities
existing
to those
foreign
personal networks.
to
According
and
have been
(1) local and
buyers
and
and consultants,
(3)
(5) institutions
such as
life insurance companies and foreign and domestic banks, and
(6) previous joint-venture partners.
Domestic
real
estate
investors
intermediaries, but to a lesser
extent.
also
use
various
Most of the larger
domestic investors have in-house departments responsible for
identifying acquisition opportunities, analyzing markets and
investments, and closing transactions.
50
Foreign
investors initially
obtain market
with which
retain intermediaries
information and investment advice
they may not
negotiation
and
yet be familiar
structuring
of
intermediaries are often retained
closed
to monitor
make
more
investments,
of
to
search for
dependent on
markets
and
U.S.
the foreign
business
in the
These
additional
to help develop investment
Some
foreign investors
intermediaries than
largely
or to aid
transactions.
the foreign entity.
use
in markets
after the transaction has
investment opportunities, and/or
strategies for
to
others.
This
is
investors' knowledge
of
practices
which
in
turn
is
dependent on the length of time they have been active in the
United
States.
In
Chicago,
a majority
investors have
dealt primarily
York City, who
in turn have established
and
relationships in
Chicago
of
the
with intermediaries
foreign
in New
the local contacts
on behalf
of their
foreign
clients.
Intermediaries
transactions
are
between
foreign investors.
directly
not
always
domestic
real
involved
estate
in
Chicago
entities
and
In some instances, property was marketed
to foreign
concerns
by
domestic sellers.
practice of
direct contact and negotiation
commonplace
over
time
as
relationships
between domestic and foreign parties.
51
This
may become more
are
established
Chicago
other
is similar
cities that
addition
have
to these
not
unique to
foreign
Chicago
product to
foreign investors.
investors enter
of industry networking.
the
elements are present
economy, and
attracted
reasons,
market as the result
are
in size,
market
In
this
These factors
as all
of
these
in other markets such as
New York and
Los Angeles.
One feature that differentiates
Chicago from
other markets
is its location.
the United States, Chicago
heavily
their
invested in
holdings of
offers off-shore
Situated in the
offers foreign investors who are
coastal cities
U.S.
middle of
a chance
property.
to diversify
Additionally,
Chicago
to industry,
some of
Chicago provides
foreign
investors proximity
which is foreign-owned.
Portfolio
Diversification.
investors, whose investments are heavily concentrated in one
region
of
the
geographically
estate.
United
diversify
Domestic
States,
their
firms
an
opportunity
portfolio
often
diversify
of
U.S.
real
to
real
estate
portfolios in this manner as well.
Proximity
to Industry.
With
Chicago considered
the
capital of a region dominated by industry, foreign investors
have opportunities to invest in real estate that is close to
industry,
especially to
the foreign
manufacturing plants.
With several Japanese auto and electronics plants located in
the
central United
States,
52
investment
in Chicago
offers
these investors proximity to
these
facilities
are
these investments.
established,
familiarity
As more of
with
the
region is also likely to increase.
Why Chicago?
Not unlike
cite for investing in
express interest
and
product.
investors
to
the reasons foreign investors
other U.S.
in Chicago
Personal
the
cities, foreign investors
because of its
relationships also
city,
as
well
as
size, economy,
attract foreign
opportunities
for
portfolio diversification and the opportunity to be close to
foreign industry.
WHY NOT CHICAGO?
Since Chicago is similar to other U.S. markets in which
there is
a demonstrated interest by
then
it not
is
considered
foreign entities to
and
has
real estate
be a "tier one"
Even though Chicago is the
States
by
a
foreign investors, why
analysts
and
choice for investment?
third largest city in the United
diverse
economy
in
addition
to
investment-grade property, many real estate professionals on
both
a
local,
Chicago
level
and
a
national
level
nevertheless feel that this alone is not enough to stimulate
foreign acquisitions of property in this area.
As of July, 1987,
foreign
according to those interviewed, some
investors continue
to
express
concern, and
most
remain cautious, regarding investment in the Chicago market.
53
Reasons
frequently
professionals and
given
by
unavailability
ownership
real
estate
why there is
not a
investment in this market include
of
product
traditions
competition),
domestic
foreign concerns for
greater volume of foreign
the
both
in
(stemming
Chicago
and
from
from
property
domestic
the softness of the market, unfamiliarity with
the area, and the perception of risk in the market.
"Things
domestic
Just
Aren't
sources
"owned"
by the
Changing
interviewed
major U.S.
emphasize
life
buildings to
want
aren't
that
already
owned
data collected since only
were identified.
sales are
However,
according to
recently
report, at
in
speculate that
is
not
downtown
there are
deep pocket
owners."
in
a real or
the
Chicago
a perceived
properties with foreign ownership
analysts in the market report
frequent
a Jones
least
One
cannot be substantiated from the
Real estate
property
is
[foreign investors]
turnover
Whether this is
lack of product in Chicago
companies.
the
this ownership pattern produces
investment-grade property
metropolitan area.
market
by
of
Chicago
seems that
fit what they
Industry analysts speculate
a lack
"It
Many
that
insurance
real estate professional commented,
not enough
Hands."
occurrences in
Lang Wooten
seven properties
Chicago.
Others
Chicago.
Chicago office
have been
in
the
sold
industry
the "Chicago mentality" of property ownership
to "build, mortgage,
and hold."
54
estate
real
to
According
Market.
Soft
The
professionals active in the Chicago market, there appears to
to the softness of
is attributed partially
the market.
In
ownership
current
mentioned
previously
the
to
addition
This
this time.
to sell properties at
be a disinclination
trends in the market, analysts and property owners feel that
the
property owners
reluctance of
to receive
inability
from the
stems
of property
to dispose
adequate returns
on
properties due to the high vacancy producing a corresponding
flat rent
"There
One real estate
scale.
more
is
added,
professional
product
Without
opportunities
than deals"
talk
Chicago and
another
changing
hands."
are
there
sale,
for
in
aren't
just
"Things
professional speculates,
foreign investors
available to
investment
no
who want
to
acquire real estate in Chicago.
Twelve percent
vacancy rates
in Chicago,
compared to
cities like Washington, D.C. and New York City whose vacancy
foreign
suppress
supply
foreign
of
investments
who
that will
looking
produce
for
a steady
foreigners are not comfortable with
where
appealing to
less
demand
are
environment
An
investment.
space exceeds
investors
percent, 9- further
percent and 9.8
currently 9.9
rates are
safe,
the
those
risk-free
cash flow.
Many
nor are they willing to
take leasing risks, and the high vacancy rates in the market
often signal increased risk to foreign investors.
55
Lack
of
of property
mentality
explaining why
in the
known
capital
Chicago has not
been a more
from which
foreign countries
foreign clients, Chicago is not
those
to
According
originates.
a
professionals
popular choice
as well
city is not yet
investors is that the
for foreign
estate
real
by
"Chicago
the
soft market,
and the
ownership"
frequently
given
reason
to
In addition
Familiarity.
the investment
who
represent
a "port city." As mentioned
previously, one of the reasons that foreign investors invest
in a
professional
working with
Chicago is the most
One
due to recognition.
city is in part
real estate
that
investors commented
Dutch
underrated city by foreigners primarily
due to their unfamiliarity with the city.
attractive
familiar not
to foreign
transactions
home
because it
that these
those who must
countries.
is the
Angeles which
city.
There is
ranked third it does not
these other cities.
cities are
approve the
Foreigners
capitol of
"know"
the United
York City as a world
a large Japanese population in
contributes to
Clearly,
cities
representatives of the
Foreigners also recognize New
financial capitol.
that
investors is
but also to
in their
Washington, D.C.
Los
"popular" investment
the
only to the U.S.-based
foreign companies,
States.
of
makes many
What
Japanese recognition
because Chicago
is
landlocked
of
and
command the same recognition as do
It is much easier to sell an investment
56
"back
essence,
"sale" needs
only one
It
city.
of the
transactions are
an additional "sale" needs to
not familiar with the market,
made; that
in
the
that of
be made;
to
When those that approve
property itself.
be
there, because
city known
in a
it is
home" if
once Chicago
is possible
becomes better known, together with the other factors making
market
in this
investment
investment
attractive, foreign
activity will increase.
Industry professionals speculate
Domestic Competition.
that
for
competition
investment in
Chicago.
properties
limits
also
Currently, many feel
foreign
pension funds
and life insurance companies, both domestic and foreign, are
competing for
addition
the same types of
that, in Chicago, it is
In
suggested
professional
competition, one
the
to
investment properties.
much easier to submit properties to
domestic firms because these domestic firms maintain offices
in
the city,
whereas
access to
foreign
To tap foreign
party must
approach a foreign investor
an intermediary in New York City.
have
ability
the
be
sources of capital, the domestic
difficult.
investors
entities can
investment opportunities than
directly or through
Additionally, if domestic
to respond
quickly
more
to
do foreign investors, foreign
investors may miss out on investments in Chicago.
Another
form
investment advisors
of
domestic
competition
express concern
57
about
is the lack
which
of supply
restraints in the Chicago market.
for
rigid
without
the potential
Because of
development controls.
competition
through
artificially restrained
nor
undeveloped land,
zoning or
large amount
restrained, because of the
neither physically
of
Development in Chicago is
supply,
on
restrictions
foreign investors perceive more risk in this market over the
long
run.
are restraints
there
Angeles and
both Los
In
supply
on
in Washington,
resulting from
D.C.,
stringent
zoning regulations and development controls imposed by those
cities.
Although there
Chicago,
they are
cities.
For example,
Washington, D.C.
there will be
restrictions on
are some
not nearly
due to
market,
development controls
as restrictive
as in
various restrictions
it is estimated that
no remaining space on which
in
other
in the
in 12 years
to build. 1 0 With
supply, foreign investors are
assured that
their properties will remain occupied and therefore generate
the projected cash flows.
Distance
opportunities.
to
Relative
Although
international airport
Chicago
in the
Alternate
has the
Investment
second
world, Chicago is
busiest
still more
difficult to get to, from a time standpoint, than other U.S.
cities on
either coast.
For
get to
is at least three hours longer;
Chicago, the trip from home
therefore, foreign
a foreign investor to
investors tend
to keep
"closer to home" and in better-known cities.
58
their interests
it
levels
strategies of
many
Chicago real
not reached
Specific
cities.
U.S.
other
in
has
estate
reasons
conflicting
foreign investment activity has
explaining why
the
equally as
are
There
market.
the
in
to invest
investors
foreign
good reasons for
doubt that there are
There is little
insight on
foreign investors give additional
what basis they may enter this market.
INVESTMENT IN
FOR U.S.
FOREIGN STRATEGIES
COMMERCIAL REAL
A NATIONAL PERSPECTIVE
ESTATE:
Foreign
investment
estate
is
expected
to
Japanese investment alone is expected
increase nationwide.
to double
real
in
According to their
in 1987.12
advisors, foreign
entities, such as English and Dutch investors, who have held
property for some length of time are beginning to re-examine
their
U.S. properties
portfolios of
these properties or sell them.
to remain
foreign
investors.
The traditional markets seem
top locational investment
strong as
Those
that
refinance
and either
choices for
represent foreign
clients
also commented that investments in the sunbelt are no longer
of interest
cities.
due to the
Foreign
failing economies of many
investors instead are focusing
that have a broad and
of these
on markets
diverse economic base which they feel
are able to sustain fluctuations in different sectors of the
economy.
59
hotel
inability
increasing
familiarity
markets and
comfort
and
products,
both
with
in
foreign
of
because
locate existing
to
investors'
may increase
opportunities
investors
foreign
to
attraction
professionals
Industry
properties.
that development
speculate
existing
development projects, two of
seven represent investments in
are
exclusively in
transactions identified in Chicago,
properties.13 Of the 26
which
development
in
involved
to investing
as opposed
ventures
becoming
are
investors
foreign
many
that
increasing evidence
is
There
Development
their
domestic
inability to
joint-venture partners, and their
continue to compete for prime properties.
investment
existing
locating
opportunities
in most
million square feet
look to
markets are
in 1988 and 1989.14
property,
abundant.
development
In
1986, 13
in Chicago.
An
is expected to
Domestic developers often
and/or equity
capital for debt
Foreign investors who participate in development
exposure to risk by negotiating
ventures can mitigate their
master leases, pre-leasing
and convertible
have
difficulty
having
square feet of space
foreign sources of
financing.
are
of space was developed
additional 5.2 million
come on line
who
investors
foreign
For
debt.
been negotiated
domestic parties
requirements, preferred returns,
of these types
All
in transactions
in Chicago.
60
of arrangements
between foreign
Joint ventures
and
with domestic
learn
projects
development
to secure a low-risk position,
understanding of the market,
to
acceptable
obtain
foreign investors are
own "the
and
yields,
in
invest
to
prime
quick to comment that many
Industry sources were
property.
knowledge and
opportunities to increase their
advantage of
take
to
investors
foreign
enables
their
Participating in
an experienced partner.
affiliation with
through
markets
development and
U.S.
about
in and to
foreign concerns to participate
firms also allow
they want to
beginning to realize if
to have to "get
in" at the
industry analysts
project a
best," they are going
development stage.
Suburbs Some
trend of foreign
real estate
This is most
investment in the suburbs.15
likely, however, for investors from those countries who have
a cultural reference point for suburban development or those
investors
who
Chicago,
there
Eastern
are
investments
in
English,
German,
Dutch,
United States.
the
with
are familiar
suburban
and
Middle
properties
office
In
and
regional malls.
Suburban investment
investors.
The Japanese
suburbs.
One
speculated that
the
Japanese
popular among
have yet to invest
investor
who
the Japanese will have
suburban markets
cities become
is not
as opportunities
less frequent.
61
However,
all foreign
in the Chicago
was
interviewed
to eventually enter
to invest
in major
downtown properties
are
investment
the preferred
they
because
feel
exhibit
downtowns
in suburban
familiarity with
properties
Both
following
trends
of the
risk posture
factors
these
of time
cultural
function of
is a
and the
of
length
by the
determined
because
investments
safer
A foreign investor's willingness to
the suburbs
investor.
foreign
investors
most foreign
recovery
stronger
soft-market conditions.
invest
are
these
for
the
are
largely
investor has
been
active in the United States.
Financing An alternative to direct equity investment in
real estate that has been
prevalent in today's
to be
debt
popular in the past and continues
financing.
investor.
mitigates
One Chicago real
attractive to
this is
domestic firm
100 basis
entity
This
real estate markets
to
foreign
of the
transaction: the
obtain low cost
financing, often
points below domestic financing,
is able
to the
estate executive commented that
both sides
is able to
the risk
is foreign
less risk
assume
in
and the foreign
the real
estate
investment.
Landaur and Associates states in a June, 1987 report:
Japanese banks have earmarked tens of billions of
dollars for financing commercial property in the
They have captured the $50 million-plus
U.S.
segment of the commercial mortgage market because
of higher lending limits, quicker loan closings,
and rates just below those offered by American
banks. According to industry experts, as of the
spring of 1987, there are no more than five to 10
willing to bid on
single-source U.S. lenders
62
of $100 million or more,
stand ready to quickly
quality real estate deals
while 20 Japaggse banks
submit offers.
FOREIGN STRATEGIES FOR REAL ESTATE INVESTMENT IN CHICAGO
of those interviewed
A majority
one
point:
major
being
closely
and their advisors.
Most of
currently
is
Chicago
monitored by foreign investors
consistently repeated
these advisors are predicting an emerging trend of increased
establishing
foreign clients.
service
to
market
the
in
offices
of their
requirements
is evidence
that
investment bankers are expanding
international advisors and
or
There
city.
the
investment in
foreign
Whereas the
the
real
estate market is considered by real estate industry analysts
to be overbuilt and therefore weak at the present time, they
real
estate markets,
overbuilt as
to be as
consider Chicago
do not
namely the
cities in
other U.S.
the "oilpatch"
Colorado) of the United States
region (Texas, Oklahoma, and
whose average metropolitan vacancy rates have soared to 31.9
percent.
foreign
Both
domestic
foreign
professionals
and
foreign investment
activity should
as excess supply is
absorbed and as
investors feel
substantially increase
estate
real
the
familiarity with
market increases,
providing
there is product for sale.
Since the beginning of 1987,
increase
in
Japanese
investment
63
there has been a dramatic
in
Chicago's
central
Since late 1986, four projects have been
business district.
projects are:
These
Japanese capital.
announced involving
the Nikko Hotel; Xerox Center; Prudential Plaza One and Two;
Reports suggest this is merely
and 101 North Wacker Drive.
the tip of the
major
Chicago
with
involved
negotiations.
iceberg.
When contacted, representatives of
various
However, since
been finalized, the properties
current
in
investors
Japanese
being
to
admitted
companies
estate
real
these transactions
have not
cannot be publicly disclosed
or the specifics of the transactions discussed at this time.
Seven such
were
located in
transactions, all
If
identified.
completed, these
downtown Chicago,
will
transactions
represent foreign investment in more than 5.5 million square
feet of space.
Of
recent transactions
the 26
involving foreign
projects,
one
sources of capital, nine
is
a
renovation
office buildings,
are hotel
two
completed, will add over 1,000
supply of
20,000 rooms,18 and
equity investments
project,
Chicago market
are development
and
seven
are
of the 26 properties
Twenty-three out
suburban properties.
are
in the
projects that,
when
rooms to the cities existing
three of the
recent foreign
in the Chicago metropolitan
area are in
regional malls.
There
is not
universal
agreement
'among real
estate
experts regarding the status of Chicago as an existing or as
64
a potential target city for foreign equity investment.
Chicago a primary city for
industry sources do not consider
foreign
investment at
Chicago
real estate
that the
Others report
this time.
studied, and
being closely
market is
Some
that Chicago properties are being actively sought by foreign
Dutch investors have recently
Both Japanese and
investors.
of target cities, according to
added Chicago to their lists
of one
exception
investors
foreign
metropolitan
a
Japanese
The
cities.
other
one exception
not
does
who
investor
Chicago
the
in
investments in
estate
real
primarily coastal
cities,
this,
area have
property
own
who
Chicago, the
active in
foreign investor
the
With
investors.
foreign
these
of
representatives
currently
to
own
property in one of the favorite investment cities, said that
his
in Chicago
company's investment
resulted not
because
but rather because his firm was
Chicago was a first choice,
unable to locate investments in
the other major cities.
In
the process of seeking real estate investments in the United
States, the
to this
opportunity to invest in
bank.
firm by a Japanese
Chicago was presented
It was only
after being
bank that the Japanese investor
approached by this Japanese
began to study the Chicago market.
Partially
investors,
may be
due
to
the
many professionals
becoming a
first tier
65
recent
presence
of
interviewed believe
city for
Japanese
Chicago
foreign investors.
foreign interest
in real
to
foreign
In
Chicago.
in
investment
estate
to be
there appears
negotiated,
currently being
known transactions
the seven
Judging from
addition
investors pursuing investments within
the market, there are
firms who are currently
marketing property in
several U.S.
Tokyo
by both
perceived
Chicago.
economy;
the
recognition;
strategies and
and;
foreign investment
will
increase
thing as
thing
as
industry.
to
in the
a typical
investment
presence
in
Acknowledged
to indicate
Chicago metropolitan
foreseeable
future.
However,
area
as
just as
there is
no such
domestic investor,
there is
no such
clearly indicates,
a "typical"
in
diversification
that
Chapter Five
invest
networks; portfolio
proximity
the
definite
international
recent investment behavior seem
in
an
its
availability;
personal
opportunities
alternative
established international
product
Chicago;
to
would want
of
saturation
opportunities;
to be
following: its size; its diverse
They include the
the
is
are
There
environment.
investors
foreign
why
reasons
Chicago
foreign parties
domestic and
investment
attractive
investment.
foreign
attract
hoping to
an office in
has recently set up
headquartered in Chicago,
which is
For example, JMB,
foreign investors.
Chicago to
foreign
investor
structure in the Chicago market.
66
or a
typical
deal
Chapter Four
Endnotes
1 Sean
Burns, "The Contribution of Foreign Portfolio and
Direct Investment to the U.S. Housing Market in 1986,"
(January 1987).
2 Michael
Smith and Kevin Whalen, "Japanese Investors in
United States Real Estate: Are They Really Different? A
Review of Activity in the Los Angeles Area" (M.S. thesis,
Massachusetts Institute of Technology, 1987).
3S. John Hodge and S. Kent Roberts, "An Assessment
of Foreign Investors in the Washington, D.C. Real Estate
Market" (M.S. thesis, Massachusetts Institute of
Technology, 1987).
4 The
Chicago Association of Commerce and Industry, "The
New Chicago."
5 Jones
Lang Wooten Investment Research, The Downtown
Chicago Office Market Report (November 1986), 1.
6
Ibid.
7 Real
Estate Forum, 42, (May 1987), "The Japanese and
their 'Yen' for United States Real Estate."
8 Jones
Lang Wooten Investment Research.
9 Richard
L. Stern and Howard Rudnitsky, "Commercial
Real Estate - The Worst is Yet to Come," Forbes, 139, (26
January 1987).
1 0 Hodge
and Roberts.
1 1 Jones
Lang Wooten Investment Research, "Foreign
Investment in U.S. Real Estate," Urban Land, (April 1987).
1 2 Real
13
Estate Forum, May 1987.
Ibid.
1 4 Jones
Lang Wooten Investment Research.
67
1 5 John
E. Tsui, "Japan - The Land Rush," Development
Magazine, (June 1987).
1 6 Landaur
and Associates, A Summary of Japanese Real
Estate Investment and Development Activity in the United
States 1984-1987,
(June 1987).
1 7 David
J. Kostin and David Shulman, A Look Behind
Office Vacancy Rates, (Salomon Brothers, Inc., 25 June
1987),
2.
1 8 Jerry
C. Davis, "Third Record Year for Office
Leasing," Commerce 84 (April 1987).
68
Chapter Five
EXAMPLES OF FOREIGN INVESTMENT IN THE CHICAGO MARKET
The initial data-gathering for this analysis focused on
partially
1980 to the present.
many
foreign-owned
One,
is
as
Chicago
in
properties
possible.
that there are ommissions in the
the limitations discussed in Chapter
Whereas, due to
it
from
attempt was made to identify as
Every
However, there is no doubt
data.
were purchased
investors which
by foreign
or
wholly
properties owned
Chicago
specific
identifying
impossible
report
to
transactions that have closed
on
the
universe
of
in this market, the following
four cases and the three pending transactions were chosen to
highlight the diversity of deals
the
past five
Although
many
years or
26 foreign-owned
instances, because
there was
information
have been
place in
to take
about
properties
of the
with respect
to
issue of
the
Exhibit
obtaining specific
In
those
an issue, the identities of
and the properties
10 lists the
involving foreign investors in Chicago.
69
in
confidentiality,
transactions.
involved in the transaction
ommitted.
Chicago.
were identified,
a corresponding difficulty in
cases where confidentiality was
the parties
that have taken place over
26 transactions
THE PLAYERS
Although
been active
have all
investors
Eastern
and Middle
German,
English, Dutch,
Chicago market
in the
at
least since the beginning of this decade, the recent foreign
has
activity
investment
indicated by
Japanese,
been primarily
as
is
activity in the
Exhibit 10, paralleling their
rest of the nation, although to a lesser extent.
As
with foreign
United States
in the
investment
general, the players in Chicago have changed over time.
current players
In the
at any given
and in the
The
with capital.
time are those
1970's, both nationally
in
Chicago market,
because of oil prices, Middle Eastern investors were active.
In the
early 1980's,
Western European
foreign investment in real estate.
late 1980's, Japanese
investors dominated
Currently, in the mid to
entities are the new
wave of foreign
investors pursuing U.S. real estate investments.
In addition to investors representing different foreign
countries
involved in
Chicago
in this
foreign investors
market are
include: wealthy individuals,
companies,
consortiums.
prefer
construction
Most
to keep
investors in this
a
market.
pension funds, life insurance
companies,
low profile,
pooled
as
Looking at such
70
of
group and
a diverse
foreign investors in the
very
the types
real estate,
funds
and
Chicago market
do the
domestic
a diverse group
both
of
terms
in
makes
type
only
Chicago not
investors in
on foreign
generalizations
investor
and
nationality
difficult but also inappropriate.
CASE STUDY #11.
55 WEST WACKER DRIVE
negotiation
length
arms-
of
months
Inc.,
Wilma Realty,
firm,
investment
Dutch
three
after
Combined
with
The
U.S. insurance company.
International, a
sold to a
55 West Wacker Drive was
In November, 1986,
property was
originally under contract to a domestic real estate company,
Trump Interests,
(Julius)
equity
financing.
previously
suggest Trump
Sources
Trump subsequently
the purchase,
and Wilma
changed its
stepped in
the deal,
had a
estate
other real
in
Wilma, having already committed
participation in
for
approached Wilma
then
established relationship
When
ventures.
who
mind about
to an equity
to become
the sole
purchaser of this property.
55
West
building.
Wacker
a
is
first as
single-tenant building,
headquarters.
square
foot
office
this building was originally a
Now 18 years old,
Cross and Blue Shield
200,000
the headquarters
of Blue
and later as Combined International's
a
Although
prominent
building
in
a
prestigious location in Chicago's central business district,
the
building was
sold
Combined International
by
because
space could not be accommodated
their demand for additional
71
lease 300,000 square
They currently
existing site.
on the
feet in a building completed in 1986.
million and
$22
at
was appraised
building
The
was
initially marketed to single-tenant users at an asking price
of $26
single-tenant
sale, potential
the
involved in
to an intermediary
According
million.
interest in purchasing the building
users expressed
little
at the time because the
market made
leasing a
more economical alternative to equity investment.
According
lease
to
in the
concessions available
this same
the
acquiring
in
interested
also
investors were
domestic
professional,
like
and,
property
Wilma,
submitted bids at deeply discounted prices from the original
Wilma's offer to purchase the
asking price of $26 million.
property was $16 million, the most attractive offer made.
Realty
Wilma
of this
renovation
multi-tenant
the
$16
is
in
purchase
not required
even the
of
by law,
addition to
price, sources
in
the
As
interest in the
renovation is the
asbestos in the building.
the new
owners insisted
on removing
seemed to
building but, as the leasing
72
Although
insignificant amounts
1987, there
of June,
market
as much as the property.
VAT flooring which contains
asbestos.
a
In
overall costs of the
complete removal of the
the
building.
speculate the renovation will cost
Contributing to the
building to
single-tenant
formerly
speculative office
million
completing
of
the process
be much
agent for the
property reported, there are no signed lease commitments for
One local
any space.
investment represents
real estate executive speculated this
by a
the riskiest venture undertaken
foreign investor in the Chicago market.
After purchasing 55 West Wacker, Wilma retained a local
real
estate
firm
co-develop, lease,
to
and
manage
the
Recently, Wilma sold a 50 percent interest in the
building.
building to a
Dutch real estate investment
trust, VIB N.V.
"VIB N.V. is an open-end real estate investment company with
the tax
are
status of an
quoted
and
investment trust.
traded
on
the
The shares
official
market
of VIB
of
the
Amsterdam stock exchange."1
55
West
Wacker
represents
Wilma's
purchase in
the Chicago area.
real estate
investments in Atlanta, Miami,
first
The company has
and has been
active in U.S. real estate for
president of
Wilma said
that they had
and
only
other U.S.
and Los Angeles
10 years.
no plans
The
to pursue
additional investments in Chicago until they see the-outcome
of
55
West
Wacker.
acquisition in
International
first real
Not
only
was
this
Wilma's
Chicago but, a representative
said that
this was
estate venture
first
from Combined
Combined International's
making it
difficult for
him to
speculate on differences in foreign investor behavior.
In addition to the
services provided
development, management and leasing
by Klaff
Realty, Wilma has
73
retained the
estate firm to
another local real
services of
property.
and management of the
construction, leasing
of Klaff Realty, who
executive vice president
monitor the
The
at first was
skeptical of the involvement of another party, said that the
relationship
and
has
represents
the
particularly beneficial
proved
has
expedited the decision making process substantially.
PRUDENTIAL TOWERS
CASE STUDY #2:
capital
The deal
Nissei has
general
a joint-venture
Two Prudential
recently begun
Japanese life
partners
Plaza.
to be
been estimated
in
the
The
equity
insurance
percent
a 50
for
Plaza and the
the existing One Prudential
interest in both
from
is
Japanese
infusion of
a major
by
into Chicago
company.
joint-venture
acknowledged
publicly
first
Towers
Prudential
The
equity infusion
$140 million.2
The
agreement
are
joint-venture
Prudential Life Insurance Company and Nissei Realty.
Nissei
is the U.S. subsidiary of Japan's largest insurance company,
Nippon Life.
Prudential is the largest insurance company in
the world. 3 "Nippon began
market in 1978 -permitted
direct
evaluating the [U.S. real estate)
three years before the Ministry of Finance
investment
by
Japanese
life
insurance
companies." 4
After
less
than
six
presentation to closing, the
74
months
from
the
initial
transaction closed just before
years-end on December 29, 1986, according to James Purinton,
this venture when
prior to
had done business
and Nissei
Prudential
office.
Chicago
Development's
of Prudential
Manager
General
the
Tower in San
Prudential sold the Crocker
Francisco to Nissei in late 1986.
as a general
is structured
The deal
partnership with
Prudential acting as the developer (of Two Prudential Plaza)
A local firm has been retained
and as the managing partner.
as
for
leasing agent
the
authorized to
make the
the
Prudential
buildings.
day-to-day decisions
is
regarding the
property although Nissei remains an active partner, who must
be consulted on any major decisions.
The 41-story One Prudential Center was built in the mid
currently
is
and
1950's
substantially leased
area.
rentable
major
and contains 1,100,000 square
move
will
Company, the
Burnett
Leo
tenant occupying
their space when
they
The
It
renovated.
being
225,000
their lease expires in 1989
500,000 square
into
feet of
building's
feet, will
square
vacate
at which time
in
feet
is
their
own
headquarters building currently under construction.
Two
Prudential Plaza
April, 1989.
930,000
The new 64-story tower will have approximately
square
feet of
already committed to
major
law
completed in
to be
is expected
firm
has
leasable
area.
McGraw Hill
a minimum of 75,000 square
committed
75
to
32,500
has
feet and a
square
feet.
Purinton
combined
Two never falls
Prudential Plaza One and
occupancy of both
that
so
is timed
project
the
stated
below 60 percent.
Purinton suggested the deal structure of this project is
not
to
unusual compared
have
behavior, he
respect to foreign investor
With
negotiated.
structures they
other deal
felt it was unusual for a foreign investor to participate in
Although no
deal
essentially
was
that
a venture
cited, Purinton
specifics were
development for the Japanese investor
tendancy to
in
be risk averse.
also commented that,
transactions
involving
Japanese
make a
Nissei was able to
even though
relatively quickly
of this
who he believes has a
Purinton
in the press,
investors covered
decision
other
to
comparison
emphasized the
the risks
to mitigate
so as
was structured
development.
one-half
ultimate approval
came from Tokyo.
CASE STUDY 131
THE NIKKO HOTEL
October, 1987,
the
Chicago Nikko
450 room
Hotel.
Tishman Realty
venture between
Airlines(JAL)
is the anticipated completion
with
a
The
date for
a joint
hotel is
and Construction
participating mortgage
and Japan
provided
by
Sumitomo Realty.
Tishman
and JAL
introduced
were
network, according to a former
through a
employee of Tishman.
personal
A U.S.
architect, of Japanese ancestry, was aware that JAL wanted a
76
the
in
participation
finance hotel
normally
Their participation
ventures.
in
a close business relationship
after the negotiations
One year
and Sumitomo.
not
does
Sumitomo
transaction.
this transaction evolved from
between JAL
for Sumitomo's
subsequently arranged
JAL
1985.
winter of
in the
hotel and approached Tishman
Chicago for a
site in
were begun, the deal was completed.
Hotels, JAL's
Nikko
targeted several U.S. cities in
or
United
JAL
their flights.
travel
offering
by
business
hotel
generate
to
in the
of hotels
a chain
complement
will
States which
intends
which they plan to purchase
to establish
develop hotels
subsidiary, has
U.S. development
packages to tourists who both book flights on Japan Airlines
accomodations at a
and reserve
flights
into
therefore
selected
Chicago
as
targetted for hotel developments.
San Francisco,
York,
Atlanta.
In New
a hotel
was
that
represents the
cities
U.S.
Washington, D.C.,
York, Nikko has purchased
from Marriott, and in San
and
The other cities are: New
Angeles,
Los
six
of
one
has been
airport
O'Hare
Chicago's
increasing
JAL
Nikko Hotel.
and
the Essex House
Francisco, Nikko bought plans for
designed.
already
in the
first hotel
The
Chicago
planned chain
Nikko
that has
been designed and developed by JAL.
The project is
$68 million
is being
estimated to cost $74
provided by Sumitomo
77
million of which
in the
form of
million in
approximately $6
There is
participating debt.
equity in the project.
JAL
considered
for
several sites
hotel in
the
the
According to a former employee of Tishman who
Chicago area.
was involved in the negotiations,
The Japanese appeared to
be enamored not
proximity of the site to the
center of town,
several reasons.
only with the
JAL selected the site for
This real
on the Chicago River.
but also with its location
estate professional suggests that the importance of water in
the Japanese
presence and
evidenced by the
culture, as is
importance of the river in Osaka where JAL is headquartered,
were important in the ultimate site selection.
The site was
rapidly due to a
together fairly
could be put
attractive because the deal
pre-existing relationship
Tishman had
between Tishman and the seller of the property.
developed relationships with both
JAL and with the Canadian
landowner enabling Tishman to negotiate an equitable deal on
behalf of the Japanese fairly rapidly.
development
were
some
suggested
Sources
objectives of
looking
beyond
the two
chain.
establishment of their U.S.
hotel
they
are
developing,
statement and to establish a
Of ultimate
importance to
parties.
particular
this
The
hotel,
the
Japanese
to
the
Since this is the first
Nikko is
hoping
to
make
a
presence in the United States.
JAL is
78
in
inconsistencies
the long-term
goals and
On
Tishman does
side,
the other
this one hotel.
chain, not necessarily of
viability of the
be in
to
not want
the
position of operating a hotel over the long run.
CASE STUDY #4l
101 NORTH WACKER DRIVE
venture
Dai-Ichi
second largest
Life
the
is
through
a
general
of
company.5
life
U.S.
the sale
involved
transaction
largest
a
the
and Metropolitan
insurance company in Japan
second
is
Dai-Ichi
subsidiary.
U.S.
and
Mutual Life
Corporation, Dai-Ichi
Seimei America
Company's
Company
Life Insurance
Metropolitan
between
Insurance
reported a joint-
1987, the Chicago Tribune
In March,
interest
50 percent
in
partnership arrangement
The
North
101
Wacker Drive.
101 North Wacker Drive was built in 1980.
building
is
to
headquarters
Hartmarx
feet of
square
approximately
185,000
square feet.
The building is currently
the
The 24-story
who
total
occupies
567,000
95 percent leased,
according to a source at Metropolitan Life.
101 North
changed ownership
Wacker has
according to Charles Palmer,
In
1983, Palmer,
The Lendhorf Group,
president of the Palmer Group.
co-developer
their partial interest in
several times
of 101
North Wacker,
sold
the property to German investors,
who in turn sold their
building to Metropolitan Life in 1985.
interest in the
Prior to the sale of
the property to the German investors, Palmer reported he had
79
At that time
spoken to Dai-Ichi regarding 101 North Wacker.
Dai-Ichi was unwilling
was only
to take the equity
risk and instead
a debt and
equity position.
willing to negotiate
had the opportunity to obtain
According to Palmer, Dai-Ichi
higher returns through an equity participation.
The relationship between Metropolitan Life and Dai-Ichi
New York office with
was established through Metropolitan's
little
Chicago
property is leased and
The
The
office.
as the
establishes Metropolitan Life
partnership agreement
managing partner.
their
from
involvement
managed by a
local real estate firm.
A vice
president at
difference
only
with
in dealing
Dai-Ichi took longer than would
the
due diligence
a
was
foreign investor
a domestic firm to complete
Because
process.
all decisions
had to
an unusually long
in Tokyo, he reported
ultimately be made
that the
Metropolitan Life feels
time frame in negotiating and completing the transaction.
PENDING TRANSACTIONS
The transactions
are as diverse as those that have closed.
transactions
involve
Japanese
transactions involves a Japanese
local
developer.
development
of a
the Chicago area
that are pending in
investors.
square foot
80
One
of
these
construction company and a
joint-venture
This
650,000
All known pending
involves
office building
the
in
Japanese construction
The
downtown
Chicago.
own a 60
percent interest in the project
expected
the
as
soon
as
begin
to
and the remaining
retained by the developer.
40 percent will be
is
company will
Construction
transaction
is
addition
to
finalized.
construction
Japanese
The
equity position in
taking an
company,
in
period for
during the construction
construction consultant
as the
the project, will act
which they will be paid a fee.
Another transaction currently
and
company
a domestic
insurance
company is
a joint-venture as well.
to
intends
of Chicago's
of
the
The Japanese investor
interest
is
in
a
newly
1986 in the
Pending
approval
Finance, the Japanese institution will
for the 50 percent
total
insurance
Japanese
district.
financial
from the Ministry of
pay $210 million
a
building, completed in late
constructed office
heart
50 percent
a
purchase
being negotiated between
interest.
the
Currently,
debt.
$70 million
building
is
approximately 50 percent leased.
property was
This
marketed directly
investor.
The
domestic life insurance
strategy
was to
initially identify
institution
exclusive
and then
right
to
of first
offer this
refusal
81
to the
Japanese
company's marketing
a comparable
Japanese
Japanese investor
to
participate in
an
the
joint-venture.
this
that
Japanese investors' sensitivity to
approach would appeal to
ultimately justify
and would
and competition
publicity
institution felt
domestic
The
a
larger price.
To price the joint venture participation, cap rates and
and west
east
transaction felt
coasts
that "Chicago should be
many buildings have sold
price
may
be
Those
were used.
Chicago comparables were
cities."
on the
of other acquisitions
foot sales prices
per square
involved in
priced like other
also not used because not
recently in Chicago.
with
competitive
the
other
Whereas this
it
cities,
is
substantially higher, on a per square foot basis, than other
The property is expected
recent sales in the Chiago market.
to yield approximately nine percent.
The U.S. realty subsidiary of a Japanese life insurance
the past eight months with
company has been negotiating for
a Chicago developer and a large U.S. corporation regarding a
downtown Chicago that will add
major development project in
almost
two
office market
Chicago
domestic
project
developer
with a
in two
originally
credit master
underwritten
by
of
to
the
development.
The
finance
the
office space
phases of
to
intended
lease and
by selling
bonds
Instead, the developer is issuing
through a Japanese bank.
bonds
feet
million square
a
major investment
82
bank
and
the
Japanese bank is
giving a letter of
bank approached the Japanese
agreed
to
provide a
credit.
This Japanese
life insurance company who has
convertible
second
mortgage on
the
project.
The building is expected to be completed in 1989 and is
currently 70 percent leased.
Upon completion, the building
is expected to lease for $36.00 per square foot.
A vice president of the U.S. subsidiary of the Japanese
insurance company
involved in the transaction
investment opportunity
company
Before
identifying
was presented
the
agreeing to
Chicago
participate
reported the
to them prior
market
in
for
to the
investment.
the transaction,
they
reviewed the Chicago market with which they were unfamiliar.
This is their
second transaction in the
first being a limited
with Trammell Crow.
U.S.
markets and
hired an
specific
States are
"real
partnership interest in 13 properties
With
deal structures,
The
strategies
in the
American
regarding
with
real
has recently
analyze their
stated that
investment
formulation stage, they
company,"
U.S.
this firm
real estate to
vice president
American versus Japanese.
familiar
the hopes of better understanding
American trained in
transactions.
United States, the
a company
whose
in
while their
the
United
hope to
form a
employees
are
They feel that Americans are more
estate
markets
and
thus
have
established information networks within these markets.
This
83
vice
president feels
company
a
companies
competitive
who do
not
American employees,
Tokyo.
that hiring
Americans will
advantage
employ
over
other
Americans.
decisions will
give his
Japanese
Although
continue to be
having
made in
Furthermore, with an experienced and domestic staff,
this may reduce their need for intermediaries.
As
Exhibit 10
illustrates, the
the presence of Japanese,
Dutch, Swiss, Middle Eastern, and
German equity investment in
In addition,
foreign
the Chicago real estate market.
these transactions illustrate the
life insurance
development
transactions indicate
companies, construction
companies,
funds in the
area.
100 percent fee
presence of
wealthy
individuals,
The deals range from
companies,
and
pension
joint ventures to
simple purchases and involve
both debt and
equity.
From
the
foreign and
apparent
Since
cases
a variety
other
of
active in Chicago, it
However,
behavioral
differences
domestic investment behavior should
whereas
differences
described, some
nationalities and
be
be readily
more
subtle.
investor types
are
is difficult to generalize behavioral
between
Chapter
differences may
between
Six
differences
foreign
and
discusses
between
investors in Chicago.
84
domestic
some
of
foreign
investors.
these
and
general
domestic
Chapter Five
Endnotes
lVIB N.V.
Annual Report 1986
2 David
Ibata, "Dai-Ichi Buys Stake in High-rise,"
Chicago Tribune, 20 April 1987.
3 Russell
C. Lindner and Edward L. Monahan, Japanese
Investment in U.S. Real Estate: Status, Trends, and
Outlook, (M.I.T. Center for Real Estate Development:
Cambridge, MA, 1986).
4
Ibid, 34.
5 Hideki
Mitani, "Capital from Japan: Japanese
Investment in U.S. Real Estate," Real Estate Finance, 4,
(Spring 1987).
85
Chapter Six
ARE FOREIGN INVESTORS IN CHICAGO
DIFFERENT FROM DOMESTIC INVESTORS?
In
addition
domestic
sources
differently than
domestic investors.
sources had
To determine
were asked
dealing with
involved with.
involvement with
had prior
if this
estate professionals
in negotiating and
they were
foreign investors
behave
investors
transactions with foreign investors
on differences
to comment
the
in Chicago, real
differences,
language
foreign
assume
often
perception prevailed
involved in
obvious
the
to
If these
foreign investors,
they were also asked to comment if and how these differences
if there were differences between
have changed over time or
foreign
investors
of
different
whether
discussions
focused
on
differences,
between
foreign
investment
motivations, deal
nationalities.
The
there
were
or
not
and domestic
investors,
structures, decision
in
making,
strategies, management of properties, and pricing.
As mentioned previously, it
is quite difficult to make
generalizations due to the wide scope and the diverse nature
of foreign investors and investment activity in Chicago.
just as there is
complicate matters further,
To
no such thing
as a "typical" foreign investor, there is no such thing as a
86
"typical" domestic
compare foreign
which to
investor with
investors.
WHAT DRIVES FOREIGN INVESTMENT:
MOTIVATIONS
What motivates foreign investors to acquire property in
the
States
United
Chicago
in
and
has
previously
been
described in both Chapter Two and in Chapter Four.
Some of the motivations that encourage foreign entities
differences
between
of cultural
States are the result
in the United
to invest
There
nationalities.
different
are
general incentives that motivate foreign investors which are
not
applicable to
economic
foreign
situations in
For example,
investors.
domestic
countries
rate disparities
surpluses),
the exchange
real estate
investments both affordable and
well
limited
the
as
serve as incentives to
countries all
essentially
have
no
bearing
(such as
trade
that make
U.S.
profitable, as
opportunities
investment
on
the
in
other
foreign investors but
investment
domestic
decisions.
Foreign and domestic economic conditions, exchange rate
and
disparities,
motivate foreigners
States
but not
Based
on
attractive
to invest
specifically
information
investment
opportunities
their capital in
in any
received
one
the United
region or
regarding
city.
specific
transactions in Chicago, it appears that, with the exception
87
in
Both
this city.
not
yet
similar,
induce domestic investment
the same things that
by many of
are motivated
factors, foreign investors
of macro-economic
foreign and
goals
identical,
In
strategies.
and
domestic investors are motivated
addition, both foreign and
by favorable investment
have
domestic investors
yields, diversification objectives,
relationships, and investment opportunities.
identical,
underlying investment
objectives
of any
essentially
Pension
the
funds,
assuring that
domestic
or
their current
in the
and
are
assets will
future.
pension
funds
domestic, are
liability
domestic,
matching.
charged
be able
Therefore,
are
not
example, the
For
foreign or
asset
foreign
their liabilities
and
goals.
pension fund,
same
similar, if
investors have
and domestic
Foreign
with
to cover
both foreign
interested
in
safe
investments that are guaranteed to produce future cash flows
sufficient to cover these liabilities.
Both
returns
foreign and
domestic investments
anticipated from
requirements,
for
any
real estate
investor,
perceived risk of an investment.
to one
For
party, however,
example,
in
property average
United States
may not
Japan,
is more appealing
88
acquisitions.
vary
according
by
Yield
to
the
What is an adequate yield
be acceptable
where yields
two percent,
are driven
a six
on
to another.
downtown
percent yield
to a Japanese
Tokyo
in the
investor an
in Tokyo.
alternate investment
yield seems
A six percent
low to a domestic investor who is accustomed to eight to ten
Therefore, in a qualitative sense, adequate
percent yields.
must
yields
Lower yields,
and investor type.
extent on the nationality
American
to some
yields are acceptable depends
quantitatively, what
by
However,
investment.
from
derived
be
are often
standards,
foreign
to
acceptable
investors because of the safe nature of the investments.
Existing
parties
also encourage
area.
Foreign
investors
Foreign
domestic
their
than
relationship-oriented
to
appear
firms are
parties, domestic
more
much
be
domestic
complain,
often
Chicago
in the
foreign investment
concerns
domestic
and
between foreign
relationships
counterparts.
negotiating
with
more concerned
with
in
closing the transaction and moving on rather than building a
relationship.
There is evidence
basis of a prior relationship.
undertaken in Chicago on the
has yet to be completed
One transaction that
an
insurance
company and
Another transaction
was initiated
U.S.
networks
between
comparable Japanese
a
is based upon
a
The
and
domestic
institution.
involving Wilma Realty (Case
Study #1)
established relationship
through its
developer.
personal
relationship
three-year
ongoing
that an investment will be
real
estate
is no
it
investors are involved.
89
with a
industry functions
different
when
on
foreign
are motivated to invest
Foreign and domestic investors
in
properties
Chicago
of U.S.
geographically balance their portfolio
strategy to
real
diversification
portfolio
a
as
owned more
identified who
investor
one foreign
was only
there
Since
estate.
is no
property, there
than one
evidence of product diversification in the Chicago market by
fund
metropolitan
the Chicago
in
Chicago
product
concentrate
to
seem
within
diversification
in
for
market
for
this time,
as
foreign
geographic
on
more
United States
the
Chicago
within the
At
well.
diversification as
investors
and
diversification,
geographical
200,000
Domestic players in
invest
to
inclined
more
are
are both
area
buildings.
square foot suburban office
Dutch pension
by a
properties owned
The two
foreigners.
opposed
to
product diversification within any one market.
What motivates both foreign and domestic investors is a
example, location,
attributes
factors
that
investors.
Mogami, a
the
of
property
physical
by
"they
(the
90
are
yields, and
all
foreign and
important
domestic
Estate Forum, Naohiko
a vice president at
Japanese native and
that
both
May article in Real
America's investment real estate
explains
investment
that
joint-venture partner,
are analyzed
In a
appears
property-specific and investor-specific.
motivation is both
For
It
factors.
of
combination
Bank of
operation in San Francisco
Japanese]
may
have
slightly
they are driven by the same
it should not be forgotten that
benefits
criteria."
(emphasis added)1
to
be
major cities
suburbs or
same extent in the
not prevalent to the
to
for the
seems
competition
downtown prestige properties in
restricted to
and is
this
However,
property.
contribute
investment
foreign and domestic investors
competition between
same
for
motivations
investment
their
within
possible
economic
the most
investors: getting
as U.S.
investment motivation
Similar
counterparts, but
than their American
different priorities
with other property types.
DEAL STRUCTURE
In
appear
examining
differences
be
to
transactions in
recent
in
a
how
Chicago,
foreign
there
investor
approaches structuring a deal than how a domestic firm would
same transaction.
approach the
and
structure deals
differently
domestic.
of
than if
Foreign
importance
to
Foreign
with domestic
investors approach
firms and
institutions
in the
transaction were
investors often attach
different levels
both parties
different return
measures
in
property
valuation, use a longer time horizon in investment analysis,
take
different
risk
postures,
transactions.
91
and
structure
simpler
Sources commented
For
investors.
for different
measures
return
different
importance/non-importance of
on the
example, many domestic firms tend to give more weight to the
Whereas foreign firms may compute
internal rate of return.
on cash
the cash
seem to value
measure, they
this return
return more.
Foreign investors
longer time horizon than do domestic investors.
foreign
in
investors
over a
evaluate investment property
market
the Chicago
Most of the
their
extended
income and expense projections
property analysis to include
for anywhere from 20 to 40 years into the future.
Different
different time
horizons.
to have
nationalities
also seem
Some Japanese
investors operate
on a 25-year
time horizon
and one source reported that an English investor operated on
a 40-year
time
projections and
was often
investors than
this
of
difference,
out for
were carried
pro formas
time period, and the long
property
Because
horizon.
a longer
term appreciation potential of the
more important
deemed
the short term
cash flow.
to the
Short
foreign
term cash
flow may increase in importance to foreign investors if they
heed the recommendations of their advisors in the U.S.
Foreign
risk averse.
function
"foreign."
of
typically stereotyped
investors are
In the Chicago
investor
There were
type
market risk aversion is more a
than
the
transactions in
92
as being
result
which the
of
being
domestic
parties reported structuring the deals so as to mitigate the
guaranteed
and
pre-leasing,
through
party
foreign
the
to
risk
larger return than
risks for a
in Chicago
willing to take both leasing
real estate ventures that were
and development
as
Just
preferred returns.
were entrepreneurial firms involved
often there
leases,
master
normally expect from "risk-free" investments.
they would
Risk aversion
appears to be directly related to the length of time and the
Chicago market, as well
familiarity with the
of time
that the foreign
as the length
investor has been active
in U.S.
real estate.
surprise some
to
seemed
What
involving
transactions
properties was
foreign
of
purchases
of all-cash
the frequency
in
parties
domestic
Chicago
purchases.
They
did not feel this would occur in transactions involving only
domestic firms.
However, this
may be
somewhat misleading
because it is difficult to track capital flows and therefore
it cannot
be determined
if these properties
were financed
subsequent to their purchase.
A
interviewed
those
majority of
from the negotiations of two
a transaction
different
similar to what
foreign party is
involving a
set
has a
of
domestic firms.
different
variables
trade-offs to be made.
93
feel a
risk posture
to
the
table
transaction
would result
Each party in
and brings
that
a
enable
domestic
of the
because
structure
legal requirements as
client's
investment requirements.
These
deal structures
their foreign
Since these
objectives are often determined with
advisor, what ultimately
transaction.
well as with
and U.S.
a
who is ultimately
with domestic
are familiar
intermediaries
of
intermediary
domestic
the
structuring
with
to that
similar
of the foreign client
involved on behalf
charged
is
deal structure
the
Often
investment
the help of a domestic
results is a deal
that looks very
similar to a transaction involving two domestic parties.
As is the case with domestic transactions, the ultimate
deal structure results from who brings what to the table and
what
Each party
to divide.
there is
with certain goals
enters negotiations
and objectives, and one
have
ultimately
foreign
investors
similar
to domestic
investors,
goals
deal
would expect if
and
objectives
structures would
be
the type
of
similar as well.
DECISION MAKING
Depending
again on
the
nationality and
foreign investor, there are differences in how decisions are
made.
Differences in decision making specifically relate to
the amount of
In Chicago,
with foreign
with
these
close a deal.
time involved to negotiate and
some domestic parties involved
entities reported it took
foreign
parties
94
whereas
in negotiations
longer to negotiate
others
noticed
no
it took
time
amount of
in the
differences
the
to close
One source stated that it took his firm longer
transaction.
to negotiate with a domestic institution because of the U.S.
legal
domestic
With
comply.
to
which
requirements with
approval a prerequisite for investment, it is not surprising
when a foreign
making sometimes takes longer
that decision
party is involved.
For
However, this does not always hold.
transactions in Chicago were closed
example, several of the
is not unusual, from a domestic
in six months or less which
perspective.
analysis and
partner
a
Mitchell,
extensive length of
accused of requiring an
are most often
time for
Japanese investors
investors, the
the foreign
Of all
at
the New
Arthur
investments.
negotiation of
York
law
firm
Coudert
Brothers, stated in a speech "In the past, Ministry approval
has taken from three to six months; many recent transactions
company
executives
are
transactions
entire
the
done,
as
that
believe
Many insurance
45 days.
30 to
approved within
have been
more
process
and
more
will
be
accelerated further."2 In another speech, Mitchell commented
that
of the
"Some
unfamiliarity with
practices
of
speed
can be
the market in general
with
connection
in
documentation
of
lack
real
estate
continued:
95
the
attributed
to
or certain market
negotiation
transactions." 3
and
Mitchell
Another factor highlighted by many commentators
is the so-called ringi system under which all
relevant executives both in the United States and
Japan are consulted concerning the decision to
purchase a particular property. It has been
reported that this process may take between 30 to
60 days and can involve up to 10 separate stages.
Also, the speed with which a company can make a
decision will depend in great deal upon the stage
estate
its real
reavhed in
it has
that
acquisition program.
on the
estate professionals cannot rely
Domestic real
assumption that Japanese investors require more time to make
will be
made in Japan.
estate,
With more experience in
in
confidence
increased
domestic
and approval
ultimate decisions
that the
professionals is
for
assumption
valid
more
A
decisions.
U.S. real
and
markets,
U.S.
established relationships, Japanese investors are capable of
(Case Study
joint-venture
negotiate
and close
Prudential's
the
the
In
decisions.
quick
making
the parties
#2),
transaction in
initial presentation
James Purinton of Prudential.
Prudential-Nissei
were able
six months
to Nissei,
to
after
according to
Also, one source stated that
because of the number of transactions certain Japanese firms
have
in
completed
the
Finance, is beginning to
quickly since
United
States,
the
Ministry
or
process these firms' requests more
a previous relationship has
been established
between the MOF and those firms that are active investors in
U.S.
properties.
Furthermore,
96
some sources speculate that
of
to take advantage
are learning in order
Japanese investors
opportunities and
with domestic
to compete
investors,
they must make investment decisions quickly.
decision making is often a
In addition to nationality,
are required
investors
others,
as
such
domestic approval
all of the
is
making
whereas
Several
not.
likely to
information can be assembled
This, in combination
timely fashion.
are
wealthy individuals,
suggested decision
professionals
expedited if
to have
types of
Certain
well.
type as
the investor
function of
be
in a
with pre-established
relationships, is likely to produce quicker decisions.
STRATEGIES
Many
interviewed believe
of those
strategies are
a function
understanding of
and understanding
that the foreign
foreign investment
of the investors'
U.S. real estate markets.
in turn is
knowledge and
This knowledge
linked to the length
investor has been active in
of time
the U-.S. real
estate market.
Differences
and
in investment
domestic investors
locational
preferences,
strategies between
are most
product
apparent with
preferences,
foreign
respect to
and
the
aggressiveness of the investment strategy.
One strategy that differentiates foreign investors from
domestic
investors
is
their geographical
97
and
locational
major metropolitan cities such
demonstrate a preference for
as
and
York
New
several
large cities,
in addition to favoring
investment advisors,
to
According
Angeles.
Los
investors
foreign
Most
investment.
for
preferences
foreign investors, depending on the length of time they have
been active
pursue
in the
in
investment,
three of
properties are
investment
amount.
one
suburban
represent
Foreign
regional malls.
example,
There
transaction.
Chicago
that can
in
criteria.
This difference
satisfy
seems
to
one
than
$100
according
invest
not
will
properties
their minimum
often lower than
For
Sumitomo
in any
transactions
the 26
suburban properties because prices
of suburban
million
are
which
investors may not pursue
intermediary,
seven
study,
this
identified
of
Out
suburban properties.
unwilling to
are often
United States,
less
suburban
are few
this
investment
significantly
to become
less pronounced with the length of time an investor has been
investing
in
Chicago are
and
a
U.S.
real estate.
owned by Dutch investors,
Middle
Eastern
investor.
properties
Suburban
in
an English investor,
One
German
investor
purchased a suburban shopping mall in Chicago but sold it to
a domestic firm just three months after the acquisition.
Property type preferences can be another distinguishing
factor between foreign and domestic investors.
a source at
Jones Lang
Wooten, the Japanese
98
According to
in particular
are
interested
not
buildings
in "pre-war"
because
most
Japanese investors think that new buildings have the longest
lasting value.
Sources report, in Chicago foreign investors
in buildings completed before 1980.
are reluctant to invest
In other cities, buildings completed since 1970 are suitable
for
investment.
downtown,
are
interest
primary
Of
well-located,
Foreign
office buildings.
substantially leased
investors are also inclined to invest in hotel developments.
Two such hotel developments are currently under construction
in Chicago
by both Swiss and
Japanese interests.
Domestic
investors often prefer not to invest in hotel properties.
do not seem
Foreign investors
respect to the amount
domestic investors with
are
they
willing
traditionally
take.
to
on
focused
buildings in major cities.
are
extremely cautious
and often
well
Foreign
located,
of risk that
investors
prestige
analyzing investment
have
office
investors.
be painstakingly careful and
opportunities
Foreign investment
risks.
strategies extend over a
than do many domestic
aggressive as
They often spend a long time and
will not take leasing
and operating
to be as
longer time horizon
Foreign investors tend to
diligent in their analysis and
rely more heavily on assumptions made in their evaluations.
In a report on Japanese
conducted
Nippon
at
MIT's
investment in U.S. real estate
Center for
Life's investment
Real
Estate
strategies for
99
Development,
U.S. real
estate
that this
authors feel
confident
investment strategy that
holds for
are identified.
acquisitions
is a typical
The
most Japanese life insurance companies:
estate
Nippon Life seeks long-term, stable real
investment in the United States that is compatible
to life
nature of funds available
with the
speculative
avoids
It
companies.
insurance
investments such as those that promise short-term
capital gain. An insurance company like Nippon
Life has to make sure that every effort to minimize
the investment risks that accompany high-return
This investment policy means
ventures is taken.
focused on existing prime
that the company has
major
in
districts
financial
in
buildings
cities...It is reluctant to invest in growing
cities, suburban areas and development projects
because it believes that such investments are
speculative and5vulnerable to changes in the state
of the economy.
VIB N.V.,
one
third
investments,
of
a Dutch
its
real estate investment
total portfolio
identifies its
strategy
in
real
estate
its 1986
annual
U.S.
in
trust, with
report:
spread of
VIB's investment strategy is clear:
risks, project management under its own control and
ownership of large projects through joint-ventures.
invested in
A small part of the portfolio is
development projects... The investment strategy is
directed towards the goal of ensuring shareholders
attractive dividends and growth in value of their
shares. Another goal is to limit risk through the
spreading of the portfolio, geographically as well
projects....Development
kind of
regarding
as
if the inherent
considered
be
only
projects will
be left with
possible,
as
much
as
can,
risks
in this
specialized
are
which
companies
or
partners
are
projects
office
in
invest
to
area...Efforts
cities like Boston,
primarily concentrated on
Chicago and Washington D.C. Also the area to the
south of Los Angeles 6and the city of San Francisco
have VIB's interest.
100
strategies, the strategies of
Like domestic investment
foreign investors are constantly reviewed and changed.
Investment
for
strategies
formulating
U.S. real
investment.
estate
differ relative
strategies also
process of
are still in the
new Japanese investors
of the
Many
to nationality
and investor type.
the
of
Many
formalization of relationships.
relationship oriented
strategies
Japanese
the
involve
They appear to be much more
than do domestic investors,
who they
often regard as more transaction oriented.
MANAGEMENT OF PROPERTIES
firms
manage and
to
similar to
which
to
the
investor
is
their property.
lease
a domestic investor
Chicago hire
in
owners
foreign property
Many
entering a new
In
not familiar.
local
This
is
market with
this
kind
of
situation it is not economically feasible to hire a staff to
monitor
the
the property.
distance a
foreign
monitor property
yet
domestic,
arise from
Management difficulties
travel to
investor must
it would with
operations as
property owner
greater travel distance involved.
with
decreasingly
important
subsidiaries.
Some of these
101
the
with
directly
a non-local,
exception of
the
This perhaps is becoming
the
presence
of
U.S.
U.S. subsidiaries are managing
properties for
in
happen
foreign
their own account,
property, they
either a
rely on
only
owning
Chicago area
the
in
investors
yet to
however,
Generally,
area.
Chicago
the
however this has
with
one
partner or
joint venture
will hire a local firm to direct management
and leasing efforts.
This added dimension to
asset managers.
several
acquisitions
interviewed
felt that
meticulous
regarding
properties.
This
horizon
often
reliance on
property
foreign
Most
comfort.
a
times
owners
security and
management
the
likely caused
is most
in
foreign
visit
their
of
those
Many
year.
foreign property
involved
the management of
entity additional
the foreign
property gives
advisors as
owners also often retain
Foreign property
owners were
quite
their
U.S.
of
by the
long time
and
ownership
their
The Japanese
long term property appreciation.
are particularly involved in property management.
PRICING
Partially due to the inability to obtain sales data, it
was difficult to find
corroborating evidence in the Chicago
market that foreign investors had
firm
would in
notion
and
investors.
a
the
same situation,
misleading
Japanese
paid more than a domestic
which
expectation
concerning
investors, in particular,
102
prevalent
is a
foreign
are willing
to pay a premium for a prestige and low-risk property.
prices paid
a domestic
the
market prices,
investors were fair
by foreign
negotiated by
often
Chicago reported
in
transactions
involved in
people
Most
advisor on
behalf of
the
foreign entity.
In two Chicago transactions
in which sales prices were
to have paid more for
disclosed, foreign investors appeared
these properties
In one
than a domestic investor
would have paid.
to close in
September, 1987)
transaction (expected
between
a
Japanese investor
for a
report the Japanese
estate
real
domestic
company
downtown office
investor used a lower
cap rate to determine the offer price.
than market rate
A representative for
nine percent are
although cap rates of
typical in Chicago,
this investor imputed the
using a
of eight
cap rate
private
building, sources
the seller reported
property
a
and
value of the
percent.
In
another
transaction, which is expected to close around the same time
between
a domestic
life insurance
company and
a Japanese
insurance company, the sales
price was based on comparables
in other markets such as Los
Angeles and New York City.
a result, the
sales price of
substantially
higher
Research estimates
over $250 per square
Jones
than
of recent
Lang
Wooten
sales prices of
foot is
Investment
between $100
7
and $150 per square foot in the Chicago office market.
103
As
difficult
to
speculative
ascertain
since
difficult
to
of
many
Also,
confidential.
and
determine
the actual
of
sales
investors for comparison.
the
most of
because
more is
in fact pay
not foreign investors
Whether or
information
sales
prices
Therefore,
are
prices
it
confidentiality,
paid
by
is
is
domestic
it is not possible to
compare sales prices with any accuracy to determine if there
in
are
fact
interviewed,
it
increasingly
sensitive
negotiating
portrays
seems
because
Japanese
According
differences.
real
that
the
Japanese
about
the
transactions
of
the recent
investors
as
press
those
to
are
becoming
they
coverage
reckless
are
which
buyers.
The
Japanese are most diligent and cautious in their analysis of
potential deals and
the prices they are
are being misinterpreted as
a premium
for
quality,
paying, they feel,
being careless rather than just
long term
appreciation
and
risk
mitigation.
WHAT CAUSES DIFFERENCES?
Different
conducted
foreign
cultures,
as well
and
professional
as
differences
distance
domestic
in Chicago
differences
tend
investors.
commented that
to cause
104
business
cause differences
business in Europe are different
These
in how
One
real
the ways
is
between
estate
of doing
than in the United States.
differences
in
opinion
transactions.
entities engaged
and foreign
between domestic
practices
Business
in
in business
are
Japan
also
different.
foreign
Are
investors?
Yes and
investors
no.
"different" than others.
domestic
from
different
Some foreigners appear
to be more
Those appearing most different are
those investors having the least amount of experience in the
market.
Thus
differ
it
slightly from
sense.
That is,
factors that
are
appears
investors
in a
domestic investors
they are
quantitative
yields, holding
differences
periods, the
decision making and perhaps in prices.
105
in
Chicago
qualitative
many of
motivated by
appeal to domestic investors.
demonstrated
different
that foreign
the same
However, there
manifested
time required
in
for
Chapter Six
Endnotes
1 Real
Estate Forum, May 1987, 42, "The Japanese and
Their 'Yen' for United States Real Estate."
2 Arthur
Mitchell, "Remarks before Crittenden's Foreign
'87 Symposium: Legal Aspects of Foreign Investment from
Japan" (Sheraton Centre Hotel, New York, 25 March 1987), 5.
3 Arthur
Mitchell, "Remarks delivered before the Japan
Society Conference on Japanese Investment in U.S. Real
Estate" (2 October 1986).
4
ibid.,
14.
5 Russell
C. Lindner and Edward L. Monahan, Japanese
Investment in U.S. Real Estate: Status, Trends., and
Outlook, (M.I.T. Center for Real Estate Development,
Cambridge, MA, 1986).
6
VIB N.V.
Annual Report 1986.
7 Jones Lang Wooten Investment Research, The Downtown
Chicago Office Market Report, (November 1986).
106
Chapter Seven
FOREIGN INVESTMENT IN CHICAGO: OUTLOOK AND OPPORTUNITIES
THE
FOREIGN
FUTURE OF
CHICAGO: TRENDS
INVESTMENT IN
AND
PROJECTIONS
According
to
local
professionals,
the
future
of foreign
foreign investment
the
investment
activity
increase.
This is
Chicago
in
on the
based
will decline,
increase, and
that investment
the
known
available.
preferences
Many
seem to
coasts become expensive and
be
prompted to
look more
future
the
has
the
of
that of
foreign
feel
potential
to
market
assumptions that
that absorption of
vacancy rates
to
interviewed
Those
the
directly tied to
in Chicago is
States.
United
Clearly,
countries.
other
in
investment
to other currencies and the
strength of the dollar relative
of
estate
real
number of factors, including the
United States depends on a
economies
national
and
space will
opportunities, corresponding
of foreign
think
entities,
will
opportunities on
as
be
the
limited, foreign investors will
closely for
investments in
the
Chicago market.
There
investment
presence of
is already
activity in
some evidence
of increased
foreign
the Chicago
market, caused
by the
Japanese investors.
107
In 1986,
the Japanese had
committed
publicly
to only
a
Since
the
mortgage.
million
of space
may double
of
two
Prudential Plazas
By year's end 1987, the
Chicago by
investments in
their 1986
1987,
involving Japanese equity
in downtown Chicago and
participation have been announced.
Japanese
$50
million square feet
North Wacker) representing 2.6
and 101
a
hotel and
beginning
projects (The
joint- venture
additional
450-room
purchasing in excess of five million square feet of space in
transactions that
the
if
in Chicago
projects
seven
are
currently being negotiated close.
Those
interviewed feel
broad
and
diversification
foreign
Chicago market.
choice
as a
investors
target
foreign investors.
Chicago
may
international
proximity
objectives and
Many
become
the
and
to
pursue
real
As those in
a
"first
portfolio
may
in
the
investments
become a first
estate investment
the industry refer
tier
advisors, preliminary
of
to industry
feel that Chicago may
city for
its size,
presence
Additionally,
firms.
international
prompt
economy,
diverse
contribute to
Chicago such as
investment in
increased foreign
its
several factors
city."
to it,
According
evidence of
for
to
Chicago's
increasing popularity among foreign investors is illustrated
by Japanese and European investors who have added Chicago to
this target
list and are
actively seeking property
area.
108
in the
several things need to occur
current level and to increase,
within the market: the market
must begin to show some signs
city must increase,
foreign confidence in the
of recovery,
at its
Chicago to continue
investment in
For foreign
and there must be investment opportunities made available to
to the
Additionally, factors exogenous
foreign investors.
market such as limited opportunities and saturation of other
U.S.
markets
real estate
could further
add to
increased
foreign investment in Chicago.
professionals who have done
Real estate
business with
foreign investors report.foreign investors are very diligent
in
trying
trends.
to
learn
Furthermore,
flow of good
on the
limited information
foreign investors
Los
Angeles
or
market
and understand
real estate is an
behavior
and
industry dependent
If the current
trend of
on transactions continues, it
may take
information.
more time than
Washington
such as
in other cities,
D.C.,
to
develop
this
understanding of the market and to feel comfortable pursuing
investments in the city.
OPPORTUNITIES FOR REAL ESTATE PROFESSIONALS
Because of the demonstrated foreign investment interest
in Chicago
foreign
and because of
investors
the differences in the
there
behave,
are
way that
opportunities
for
domestic real estate professionals, such as property owners,
109
lawyers,
brokers,
to tap
developers,
Domestic
of capital.
foreign sources
and
agents,
leasing
and
managing
real estate professionals may have opportunities to generate
fee
income, to
arrange
or equity
favorable debt
project
financing, to participate in joint venture arrangements with
foreign
entities,
an
as
to act
or
properties,
to sell
intermediary between domestic sellers and foreign buyers.
Estate
Real
leasing
and
management
firms
have
opportunities to generate fee income from foreign sources by
managing and leasing foreign-owned properties.
all, of the foreign-owned
and
local
leased by
properties in Chicago are managed
agents.
the foreign
Since
Chicago do
degree of
expertise in the
Chicago
in
not have offices
owners in
relationships with
Most, if not
market, they thus
property
nor the
form ongoing
and lease their
local experts to manage
properties.
Foreign
finance properties
equity
or
demonstrated
entities have
some
in the Chicago
combination
a willingness
area with both
thereof.
Real
to
debt and
estate
professionals seeking to refinance existing properties or to
find foreign investors a ready
finance new developments may
source of capital.
The cost to the
domestic party seeking
to obtain this low cost financing often includes agreeing to
master lease the property, fulfill pre-leasing requirements,
and
guarantee
preferred
returns.
110
These
arrangements
which is one
to negotiate the transaction,
may take longer
parties hoping to
be considered by domestic
more factor to
Sometimes, it
the foreign investor.
risk to
mitigate the
structure transactions with foreign entities.
total
sold
the
some cases,
In
investors.
in
interests
or partial
marketed and
have successfully
Chicago firms
Several
there is
This
is
of target
an opportunity
for local
possibly receive higher prices for
sellers of properties to
their properties than
if they were sold
dependent on
If foreign
to their list
to add Chicago
for investment,
cities
a
investor paid
foreign
premium, by Chicago standards, for the property.
investors continue
foreign
property to
properties
the
to domestic firms.
the
themselves and
competition in the market.
Brokers who
market have
have a
the opportunity
foreign
investors who
sellers
who are
the Chicago
thorough knowledge of
to align themselves
looking for
are
seeking to
dispose of
with both
property and
property.
Foreign
investors have a need for complete market information.
acquiring
expedite
property.
market
data
They
time investigating the market prior
will often spend a long
to
with
Brokers
collection
are
and
in
the position
to
make
to
foreign
investors aware of investment opportunities in the market.
The best way for
tap
these
vast
domestic real estate professionals to
resources
capital
111
is
to
establish
with a
relationships
foreign investor
local or
mentioned
that
difficult
to establish.
the
city
act
domestic real
managing
direct
relationships
estate developers,
together
having
leasing and
contacts
with
with their branches in Chicago,
New York City, and possibly
often precedes foreign investment in Chicago.
Therefore, it
Chicago real estate professionals to
would seem logical for
until direct
with
international investment advisors in
investment bankers and
develop networks
outside of
brokers, and
appears that
It
agents.
investors
be
sometimes
can
Often, intermediaries
bring foreign
to
was already
It
national intermediary.
through a
or
either directly
with those professionals in
relationships can be established
New York City
with foreign
investors or foreign investors begin to more actively pursue
Chicago investment opportunities.
SUMMARY OF FINDINGS
Significant differences
exist among
In Chicago, different
by both country and by investor type.
nationalities
properties,
Chicago
of
have
different
market, and
levels of
have different
preferences also vary by the
type of
a Japanese airlines is willing
of a
hotel, a Japanese
experience
risk postures.
investor.
of
the
in
These
Whereas
to undertake the development
insurance company is
112
types
different
prefer
investors
foreign investors
only willing,
arrangement with a
enter into a joint venture
thus far, to
large domestic institution.
real
U.S.
investors.
relatively new
apt
to behave
with
respect
domestic
investing
been
are
are more
domestic investor
would a
making,
in
from
who
Japanese,
real estate market
differently than
decision
have
the
However,
to the Chicago
to
like
behave
almost indistinguishable
are
time
investors.
domestic
who
Canadians,
The
they
more
the
estate,
for some
Chicago
is active in
a particular foreign investor
The longer
risk
structure,
deal
posture, and product preference.
Chicago market exhibit a
in the
regional
of
the exception
following
faster
suburbs.
strong downtown preference
suburban shopping
that downtowns
interviewed feel
Those
are apt
market conditions
soft
very strong
foreign investors
At this time, most
downtown preference.
with
types exhibit a
of all
Foreign investors
Cultural familiarity with
than
malls.
to recover
would
the
suburban markets is not
as great in foreign countries as it is in the United States,
and
know,
because foreign
investors tend
are most
major downtowns
investors
and
to those
transactions at home.
who
to go
to places
often familiar
must
they
to foreign
ultimately approve
the
Of the 26 transactions identified, 19
(73 percent) are prestige downtown office properties.
Some foreign concerns are willing to pay a higher price
113
they
use a
will
is
investor
a
for
investor,
downtown
than would
office
property.
to
not inclined
in the
invest
than the market
pay less
therefore would
rate
cap
lower
foreign
from
in Chicago
Japanese have demonstrated that
The
investors.
types of real
prices
high
command
to
able
are
estate
Not all
of U.S. real estate.
for some types
domestic
a
This
suburbs
same
and
clearing price.
More than likely, a domestic investor or another foreign
investor who
suburbs, would outbid
is comfortable with the
the Japanese investor for a suburban property.
investors are willing
now are
right
that
have
are those properties
to pay more for
that they see value in
over the long run.
mostly prestige,
been built
Those properties
downtown office
and are
1980,
since
What foreign
buildings
substantially
leased to credit tenants.
Foreign investors tend to have a longer term view.
longer time horizon is evident
projected
holding period.
to operate
tend
derived and stem
Longer
on a
Furthermore, since
both in the analysis and the
longer time
in
horizon are
foreign
the United States
safe haven for capital,
investors
why foreign
Reasons
also from their goal
holding periods
The
culturally
to preserve capital.
countries are
common.
is perceived to
be a
foreign investors are interested in
investment in the U.S. to preserve this capital.
Foreign investors tend to be more relationship oriented
114
than their
and thus do not have a
to dealing directly in transactions,
reference
involved
intermediaries
typically
transactions.
The Japanese
the
with
documentation
parties.
to
them
multitude
In
with
comfortable
feel
of
States it
the United
and
intermediaries
seem
prioritize completing
to
in
involved
paperwork
preference to
form on-going relationships with domestic parties.
investors
the
understand
to
indicate a
Foreign investors
transactions.
difficult for
is often
and
legal
domestic
with
transactions
in
necessary
of
the volume
with
and
lawyers
use of
unfamiliar
particular are
in
estate
real
U.S.
in
the
all of
for
home countries
their
point in
are used
Foreign investors
counterparts.
U.S.
the
Domestic
transaction
rather than forming an on-going relationship.
Foreign investors tend to structure much simpler deals,
by
American
transactions
straightforward
parties.
purchasers
than
transactions
involving
is not
and most
currently a
who have
property elsewhere in the
have
Frequently
are
more
domestic
Often the purchases are all cash as well.
Chicago
investors
foreign
involve
that
purchases.
their
on
standards,
demonstrated
their
first choice
preference
coastal cities over investments
this market
invested in
United States.
for foreign
own
Foreign investors
for
in Chicago.
investments
in
Foreign equity
investment is present in 51 percent of the properties in the
115
Los
In Chicago,
D.C. market.1,2
the
Washington
foreign investment
represents
of
percent
12
and
CBD,
Angeles
total inventory of space in the
less than 10 percent of the
Chicago metropolitan area.
and likely to invest in
Foreign investors are willing
Chicago
saturation
As
properties.
in these markets increase,
continues, prices for properties
and
Chicago becomes
more
familiar
foreign investment activity in
Foreign
to foreign
that
environment because
appealing investment
investors,
this market should increase.
indicated
have
investors
markets
other
of
is
Chicago
an
size, its
of its
economy, its growing international presence and its location
these investors have already
and, some of
their list of target cities for U.S.
The
with
Japanese are
Chicago and
market.
should increase
Japanese
If
and
substantial
beginning to
rates
exchange
Japanese will
increasingly look
opportunities
to diversify
estate.
number
investment.
feel more
comfortable
their purchases
surpluses
trade
added Chicago to
in
to
continue
favorable,
remain
this
be
the
for investment
to Chicago
their portfolios
of U.S.
real
This trend has already begun as is evidenced by the
of
recent
Japanese
transactions
in
the
market.
Japanese investors, including a construction company, a life
insurance company,
and a
private real estate
expected to double their purchase
116
company, are
of Chicago real estate in
1987.
Intermediaries suggest that the Japanese are studying
when they feel more comfortable,
the market closely now and
they will increase their investments.
take advantage of the
themselves to
between
professionals
estate
Real
market.
foreign
exist
opportunities
position
can
estate
investors.
income
from
fee
generate
to
estate
real
differences that exist
real
domestic
and
Chicago
foreign sources of capital in
professionals desiring to tap
this
for
opportunities
are
There
both
management and leasing of foreign owned property, to arrange
and
debt
for
equity financing
construction, to provide valuable
entrants
transactions
and
the market,
into
between foreign
product and
existing
new
market information to new
to
arrange and
negotiate
and domestic
investors
real
estate professionals.
was
Due to the
limited time frame during
conducted,
it by
no
means
regarding foreign investment in
be
useful for
each
further research
nationality separately
which this study
offers conclusive
It would probably
Chicago.
to be
rather
trends
conducted regarding
than grouping
foreign
investors together.
This study
gives several examples suggesting
behavioral differences
most likely
between different
greater than
the differences
117
that the
nationalities are
between foreign,
taken
as a
variable
whole, and
for
the
domestic.
differences
The
that
biggest explanatory
exist
among
foreign
investors is the length of time they have been in the United
States.
118
Chapter Seven
Endnotes
lMichael Smith and Kevin Whalen, "Japanese Investors in
United States Real Estate: Are They Really Different? A
Review of Activity in the Los Angeles Area" (MS thesis,
Massachusetts Institute of Technology, 1987)
2S.
John Hodge and S. Kent Roberts, "An Assessment of Foreign
Investors in the Washington, D.C. Real Estate Market" (M.S.
thesis, Massachusetts Institute of Technology, 1987).
119
Exhibit 1
Portfolio Investment by Nationality of Investor, 1985
Region or
Country
Portfolio
Position
1984
Western
Europe
Portfolio
Position
1985
Change in
Portfolio
Position
1984-1985
Percent of
Total Change
1984-1985
250,525
311,462
60,937
51.8
Canada
24,771
25,328
557
0.5
Japan
50,304
80,789
30,485
25.9
Latin American
Republics &
Other Western
Hemisphere
165,657
184,516
18,859
16.1
Other
142,119
148,822
6,703
5.7
Total
633,384
750,917
117,533
100.0
Source: "The International Investment Position of the United
States in 1985", by Russell B. Scholl, Survey of Current
Department of Commerce, Bureau of Economic
Business, U.S.
27.
Analysis, June 1986, p.
120
Exhibit 2
Foreign Direct Investment by Nationality of Investor, 1985
Region or
Country
FDI
Position
1984
Western
Europe
FDI
Position
1985
Change in
FDI
Position
1984-1985
Percent of
Total Change
1984-1985
108,211
120,906
12,695
69.1
Canada
15,286
16,678
1,392
7.6
Japan
16,044
19,116
3,072
16.7
Latin American
Republics &
Other Western
Hemisphere
16,201
17,050
849
4.6
Other
8,841
9,201
360
2.0
Total
164,583
182,951
18,368
100.0
Source: "Foreign Direct Investment in the United States and U.S.
Direct Investment Abroad Grew Moderately in 1985", News Release,
U.S.
Department of Commerce, Bureau of Economic Analysis, June
25, 1986, p.6.
121
EXHIBIT 3
FOREIGN DIRECT INVESTMENT IN REAL ESTATE IN THE UNITED STATES
1980-1985
(Dollars in Millions)
1980
1981
1982
1983
1984
1985
All Countries
6,120 8,889 11,397 13,946 17,761 18,557
Canada
1,158 1,770 1,882 2,106
Europe
European Communites(10)
2,254
2,119
4
24
493
4
23
999
569
2
135
0
80
50
Belgium
France
Germany
Italy
Luxembourg
Netherlands
United Kingdom
Dennaark,
Greece,
Ireland
Other Europe
Sweden
Switz.erland
Other
Japan
Austrailia, New Zealand,and
South Africa
Latin America
South and Central America
Panama
Other
Other Western Henisphere
Bermuda
Netherlands Antilles
U.K. Islands, Caribbean
Other
2,844 2,580
5,035 6,638 8,255
4,651 6,224 7,714
10
10
11
66
28
24
815
966
780
0
5
0
25
29
1,742 2,189 2,471
2,051 3,140 4,135
11
42
12
414
384
0
0
0
0
324
300
150
148
90
84
75
3,675
3,450
9
24
651
4
28
1,507
1,220
7
I
8,821
8,238
9
26
1,049
(b)
24
tx
264
302
394
457
56
55
60
61
4,623
(h)
583
0
444
139
744 1,054
120
117
1,979 2,566 3,273
,13 3,816 4,664 1,808
307
372
379
268
233
139
256
275
216
185
171
108
116
98 103
83
62
1,746 2,298 1,959 3,437 4,292 4,507
108
119
110
151
61 111
3,945
3,715
2,973
1,880
2,547
437
369
265
399
228
238
51'
43
47
20
83
55.
0
542
592
709
(b)
362
0
362
0
597
0
709
746
1
745
Other Africa, Asia, and Pacific
(b)
160
212
271
423
430
Memorandun - OPEC
300
373
551
610
707
737
Middle East
Israel
Other
(b)
(c)
b - suppressed to avoid disclosure of data to individual companies.
c - Less than $500,000
Source:
Survey of Current Business, Oct. 1984, at 37-38, June 19285,
at 32. Aug. 1985, at 52; U.S. Department of Commerce,
Neos, June 25, 1986, at 6, quoted by R. Peter DeWitt
in Rel Estaie Review. Winter 1987, vol. 16, no. 4.
122
Exhibit 4
Annual Japanese Real Estate Investment in the United States
*
-
($)
YEAR
INVESTMENT
1980
$264 million
1981
$302 million
1982
$394 million
1983
$457 million
1984
$744 million
1985
$1.2 billion
*1986
$2.5 to $3.0 billion
*1987
$5.0 to $6.0 billion
Estimates, Real Estate Research Corporation,
"Japanese Investment in U.S. Real Estate,
Emerging Trends in Real Estate: 1987
(Equitable Real Estate Group, Inc., November
1987).
Source: Survey of Current Business quoted by R. Peter
DeWitt in "Foreign Direct Investment in U.S.
Real Estate," Real Estate Review, 16, (Winter
1987).
123
Exhibit 5
Percentage of Foreign Holdings
of U.S. Propertaes
Netherlands
28.7%1
'A
Germany
14.2%
Japan
7.61%,
.
1980
Total Investment $3.5 billion
Netherlands
16.9%
England
Japan
Germany
10.2%
28.8%
Canada
16.9%
1986
Total Investment $14.8 billion
-'preliminary estimate
%ource: U.S. Department of Commerce
Source:
John E. Tsui, "Japan: The Land Rush,"
Development Magazine, (June 1987).
124
Exhibit 6
DOWNTOWN VACANCY
1976-1986
1716IS
14-
-I
131211
10-
7-
34
1978
1980
1979
0
Source:
1981
1982
-+
CWcAGG
1963
1984
1985
1986
WTONAL
Jones Lang Wooten Investment Research, The
Downtown Office Market Report, (Novembe'~1T986).
125
Exhibit 7
Chicago Office Market Performance and Rental Growth
Year-End
1984
1985
1986
1987
1988-89
Inventory*
85.8
89.5
94.4
98.3
103.5
New Construction
and Renovations*
3.7
3.7
4.9
3.9
5.2
Absorption* Vacancy
3.3
3.2
1.8
1.8
3.6
10.4
10.6
13.3
14.9
15.7
Source: Jones Lang Wooten Investment Research, The Downtown
Chicago Office Market Report, (November 1986).
126
(%)
Exhibit 8
FOREIGN INVESTMENT IN U.S. REGIONS:
Midwest
Northeast
Southeast
Southwest
West
Total Known Investment
Dollar Value
Amount
Percent
Of Total
(In Millic ns)
$ 110 .7
3
381.2
11
978.9
27
1,761.8
49
362.9
$3,595.5
100
1985
Trans actions
Number
7
28
33
44
20
Percent
Of Total
5
21
26
33
15
132
100
Source: Jones Lang Wooten; and International Trade Administration,
"Foreign Investment in U.S.
Real Estate," Urban Land, (April
1987), 33.
127
Exhibit . 9
Regional Origin of Foreign Real Estate Investment in Major U.S. Cities, 1979-1983
(Millions of Dollars)
Canada
Amount
Total
New York
Dallas
Houston
San Francisco
Los Angeles
Miami
Denver
San Diego
Boston
Seattle
Percent
$8.024.3 ' 100%
1,355.0
1,482.2
521.4
1,001.0
1,046.2
632.1
672.5
497.0
339.0
477.9
18
19
6
12
13
8
8
4
4
6
South America
Far East
Europe
Amount Percent
Amount
Percent
Amount
Percent
$3,716.4
100%
$502.2
100%
$681.9
100%
35
190.3
38
1,322.3
262.0
835.8
327.0
106.6
76.9
457.2
70.0
258.6
0
7
23
9
3
2
12
2
7
0
0
8.9
36.0
174.5
0
0
75.5
0
17.0
0
2
7
35
0
0
15
0
3
219.8
7.5
67.9
0
0
369.0
3.0
1.8
0
12.9
32
1
10
0
0
55
0
2
Middle East and
North Africa
Amount
$87.2
62.6
0
0
0
0
1.6
0
0
23.0
0
Percent
100%
72
0
0
0
0
2
0
0
26
0
Other
Countries
Amount Percent
$208.9
123.8
20
80
0
0
75.1
0
0
0
0
100%
59
1
4
0
0
36
0
0
0
0
Total
Amount
$13,220.9
100%
3,2738
24
13
11
10
10
9
9
5
5
4
1,753.7
1,442.0
1,364.0
1,327.3
1,154.7
1,132.7
644.3
6206
507.8
'Less than 1%
Sources: Jones Lang Wootton and the International Trade Administration
Source:
Joseph J. DelCasino, "European Investment in U.S. Office Markets,"
The Appraisal Journal, (January 1986).
Percent
00
Exhibit 10
Foreign Investment in Chicago
SOURCE
DATE COUNTRY
1986 JAPAN
1987 JAPAN
DOMESTIC
PARTNER/
SELLER
INVESTOR
FORM
PRUDENTIAL
PRUDENTIAL
PLAZA
PHASE I
PHASE II (D*1989)
NISSEI REALTY
E-JV
101 N. WACKER
DAI-ICHI
E-JV
SWISS AIR
NESTLE
EF HUTTON
E
PROPERTY
1985 SWITZERLAND HOTEL SWISS
BRAND (D)
MET LIFE
?
1987* JAPAN
AT&T CORP.
STEIN &CO.
CENTER (D*1989) (developer)
1987* JAPAN
(PENDING)
?
33 N DEARBORN
ENGLAND
1985 JAPAN
NIKKO HOTEL
(D*1987)
1986 NETHERLANDS 55 WWACKER
JAPANESE LIFE CO D-E
JAPANESE BANK
LC
E
U.K. PENSION
FUND
?
ENGLAND
FIDINAM
20 N. LASALLE
1981 NETHERLANDS O'HARE CORP.
TOWERS
1987* JAPAN
(PENDING)
1986 JAPAN
XEROX CENTER
1987* JAPAN
(PENDING)
(D)
PRICE
$140,000,000
(E*)
DUTCH PENSION
FUND: SSP
OFFICE
647 ROOMS
HOTEL
18,000
RETAIL
1,900,000 OFFICE
350,000 + OFFICE
?
$125,000,000
(P)
$360,000,000
(P)
$47,500,000
OFFICE
HOTEL
$74,000,000
E
200,000 OFFICE
$16,000,000
E
750,000 RETAIL/
OFFICE
$100,000,000
(P)
UK PENSION FUND: E
ALLIED LINES
BAIRD WARNER
570,000
?
(D*1987)
?
OFFICE
JAAN AIR LINES E-D 450 ROOMS
SUMITOMO
COMBINED
WILMA REALTY/
INTERNATIONAL VIB N.V.
1983 SWITZERLAND 10 S LaSALLE
PROP. TYPE
1,100,000
930,000
U.S. DEVELOPER JAPANESE
ENTREPRENEUR
TISHMAN
REALTY &
CONSTRUCTION
SO. FT.
?
E
OFFICE
200,000 SUBURBAN
(2 BLD6S) OFFICE
??
?
$12, 500,000
OFFICE
SUMITOMO TRUST
&BANKING
CHICAGO
DEVELOPER
D
755,000 OFFICE
?
129
900,000 MIXED-USE
(E)
$50,000,000
SOURCE
DATE COUNTRY
PROPERTY
1980 NETHERLANDS THREE FIRST
NAT'L PLAZA
1986 ENGLAND
NORTHBROOK
COURT
1984 NETHERLANDS OAKBROOK
TERRACE
1987* JAPAN
?
1987 NETHERLANDS COLUMBIA
CENTER (D*)
DOMESTIC
PARTNER/
SELLER
INVESTOR
FORM
GERALD
HINES
ROYAL DUTCH
SHELL
D
HOMART
BROSEVENOR
INTERNATIONAL
E-D
1,304,045 REGIONAL
NALL
BAIRD WARNER
DUTCH PENSION
FUND: SSP
D-E
JV
200,000 SUBURBAN
OFFICE
CHICAGO
DEVELOPER
JAPANESE
CONSTRUCT. CO.
E-JV
650,000 OFFICE
FIFIELD DEVEL
CO
1982 SAUDI
ARABIA
500 N MICHIGAN RUBLOFF
1980 SAUDI
ARABIA
OAKBROOK INTNAT'L
OFFICE CENTER
1986* JAPAN
XXX LASALLE
1983 GERMANY
LINCOLN MALL
1986 GERMANY
CHICAGO RIDGE
MALL (1)
1985 SAUDI
ARABIA
303 W. MADISON
(D*1987)
1987* JAPAN
(PENDING)
U.S. INS. CO.
?
-
?
?
?
PROP. TYPE
PRICE
OFFICE
SUBURBAN
OFFICE
$116,000,000
?
PRIVATE
INDIVIDUAL
E
600,000 OFFICE
$20,000,000
(EXCL. LAND)
?
E
300,000 SUBURBAN
(4 BLDGS) OFFICE
$30,000,000
785,000 OFFICE
$210,000,000
JAPANESE INS. CO.E-JV
LENDHORF GROUP
?
?
JAYMONT
(D*198X) - Development project/completion date
(E*) - Estimate
(P) - Total project cost, foreign equity investment unknown
E - Equity
D - Debt
* - Pending transaction
(1)
SO. FT.
Property sold one month after purchase to domestic firm.
**This list is not all inclusive and no doubt some foreign owned
property has been overlooked. While every attempt was made to be
accurate, there say be some inaccuracies in the data.
130
E
?
REGIONAL
MALL
E
?
REGIONAL
MALL
?
OFFICE
?
?
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