FEATURE — Attracting Global Capital
The Wharf | Washington, D.C.
Attracting Global Capital to
Invest in U.S. Real Estate By Peter Jun
E
ver since Peter Minuit bought Manhattan from the Native Americans in 1626 for goods worth 60 Dutch guilders (widely known today as the equivalent of $24), foreign investors have shown a lively interest in American real estate. That interest has brought both global funds and an international flair in city design and streetscapes. Gateway cities such as San Francisco, Miami, Washington, New York and Boston are reflections of European, Hispanic and Asian influences and of the foreign funding and architecture that shaped entire neighborhoods. For centuries, this influence was seen as a substantially positive force, but American attitudes began to change around 25 years ago. At that time, Japan — armed with a high-flying stock market and low capital costs — began acquiring some of America’s most iconic real estate ranging from Rockefeller Center to Pebble Beach Golf Links. Alarm bells by protectionists started to sound and some critics even denounced these deals as selling a part of America’s soul. Simultaneously, Japanese government officials reportedly expressed concerns, albeit quietly, about a potential backlash against Japan from such high-profile purchases. The climate of mutual suspicion laid the groundwork for the passage of the Foreign Investment in Real Property Tax Act (FIRPTA), an attempt by Congress to hinder major foreign purchases of important American properties. The real estate collapse of the 1990s sent Japanese and other foreign investors fleeing, but not before FIRPTA had been enacted.
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In the 2008 recession after the housing bubble collapsed, lessons similar to those learned in the 1990s became evident again to American and foreign investors. Real estate continues to be a cyclical business, following the patterns of economic and employment fluctuations, and the gradual recovery since 2008 has created an increasingly dynamic real estate market in America today.
Attraction of U.S. Real Estate
The U.S. continues to attract more global capital for real estate investments than any other country in the world in absolute dollar terms, strengthening the economy and providing pockets of value creation and appreciation opportunity across many asset classes for various investors. Canada in recent years has been the most active global investor in U.S. real estate, measured by total capital invested, but Asian countries like China, South Korea and Singapore, equipped with some of the world’s largest pension funds and Fortune Global 500 companies, are actively hunting for unique real estate opportunities here as well. Some of the large acquisitions in the past year alone exemplify this trend: One Chase Manhattan Plaza and the General Motors Building in New York, U.S. Bank Tower in Los Angeles and The Washington Harbour in D.C. These foreign private groups and pension funds, along with sovereign wealth funds from various continents aren’t just looking for solid cash flow and yield; many of them are seeking unique, irreplaceable assets not only to diversify the risk profile of their real estate portfolio, but also to strengthen their brand and footprint in the most visible cities around the world.
New York is not the only city in the U.S. that is attracting significant foreign capital. Washington, D.C., home to Madison Marquette’s headquarters, is ranked fifth most desirable city in the world for real estate investment in Association of Foreign Investors in Real Estate (AFIRE)’s recent survey (after London, New York, San Francisco and Houston). According to Washington Business Journal, of the roughly $2.6 billion in commercial real estate sales in 2013, 58.1 percent were driven by foreign capital. Even a ground-up development project like The Wharf, a 3.2 million square foot master-planned, mixeduse portfolio along one mile of waterfront in the southwest section of Washington, D.C., is also partly funded by foreign capital. When its two phases are fully completed, it will be one of the most significant new signature developments to have been built in any major metropolitan market in the United States. Washington, D.C. Deputy Mayor for Planning and Economic Development Victor Hoskins, with support from Mayor Vincent Gray, realized early the appeal of international networking and made substantial efforts to encourage Chinese investors to consider investing in the nation’s capital. By utilizing the D.C. sister-city status with Beijing, he made trips to China to woo investors and pursue other meaningful exchange opportunities. In a recent speech, Hoskins said, “The nation’s capital is one of the top world markets for foreign investments. Foreign investors are attracted to D.C. by our real estate, as an entry port to the U.S. market, our international assets and increasingly as a residential destination. Investors from countries such as Korea, China, Germany and Saudi Arabia as well as several Middle Eastern
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