HONOLULU — Japan's enthusiasm for office buildings and other commercial properties in the United States has led to a rapid increase in investors from that country buying properties in Los Angeles, New York, Washington and Chicago. It has also led to a few cases of overpayment.
From 1982 to 1986, U.S. real estate purchases by Japanese investors rose from $774 million to $2.48 billion, according to a study prepared for the National Assn. of Realtors by Massachusetts Institute of Technology (MIT). The study--"Foreign Investment in U.S. Real Estate: The New International Landlords"--was released at the annual convention of the association here.
Despite the rapid run-up in investment by the Japanese, British purchases topped the foreign investor category over the 1982-86 study period, rising from $2.1 billion to $5 billion. However, the report added that European investors typically buy on the East Coast.
Japanese Own 16 Buildings
Japanese lead the concentration of foreign investors in Los Angeles, where 51.4% of the 23.5 million square feet of office space downtown is foreign-owned, according to the study. Japanese investors own 16 buildings--7 million square feet--of the 31 foreign-owned buildings containing 12.1 million square feet in downtown Los Angeles.
"Los Angeles handles much of the Japanese imports to the U.S., is involved in the financing of those trade flows and is the most visible West Coast city," the study notes, adding that "Japanese investors are very eager to invest" excess trade surplus dollars "in high-quality investments that offer security and an attractive long-term yield."
As examples of "overpayment" by Japanese buyers for U.S. buildings, the MIT report cited the $610 million that Mitsui Fudosan Inc. paid for Exxon's New York headquarters, the highest price paid so far for an office building in New York. The study went on to say that in Los Angeles "the Japanese have sometimes overbid to the extent of discouraging competing foreign investors, or forcing them to turn to riskier properties in order to keep a foothold in the Los Angeles real estate market."
British Own 22 Buildings
In Washington, building-height limitations and zoning restrictions are viewed by foreign investors as supply constraints that make the nation's capital one of the top three real estate investment markets in the country, according to the study. British investors own 22 buildings or 34% of the 64 buildings in downtown Washington, while the Japanese are coming up fast on the outside with 12 buildings or 19% of the 64.
Because it is situated in the nation's heartland, Chicago so far hasn't experienced major foreign ownership, the report said. Excluding Canadians, foreign investors own 7% or 11 million square feet of the commercial space in Chicago, with Japanese investors owning a whopping 42.3% of this total.
"Many foreign investors view the U.S. real estate market as a safe haven for capital in the form of a physical asset that is most likely to survive in spite of economic or military upheavals," the report stated. "This finding confirms that the current wave of foreign investment is not motivated by a desire to turn a quick profit."