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Foreign Investment in U.S. Property Revives after Bad Fall

Foreign investment in the U.S. is showing signs of life again after a deep plunge earlier this year. Globally, the U.S. has been hardest hit by a deep spending decline, according to a new report by Chicago-based Jones Lang LaSalle’s International Capital Group.

For the first half of 2009, U.S. commercial real estate transactions by overseas investors fell a stunning 77% year-over-year to $14 billion. Japan was the most active international market during the period with $15 billion in commercial real estate investment. The United Kingdom was third after the U.S., with $11 billion.

The figures were revealed this week at the International Commercial Property Exposition trade show in Munich, Germany. But the U.S. news wasn’t all bad. Investment activity rose again in July and August after the six-month report, says Steve Collins, managing director of Jones Lang LaSalle’s International Capital Group.

The highest profile transaction in the U.S. with European financial involvement was the sale of developer Harry Macklowe’s former property, Worldwide Plaza, at 825 Eighth Avenue in Manhattan for $605 million. The deal represented a huge discount from the price Macklowe paid in 2007 when the building was fully leased — $1.7 billion. Deutsche Bank, which took control of the Plaza after Macklowe defaulted on $7 billion in property debt, sold Worldwide to a joint venture of owner-operator George Comfort & Sons and RCG Longview.

The purchase shows a net initial yield of 6.3% on what is now a 40% vacant building. If the building becomes fully stabilized in three or four years, the yield will likely be closer to 12%, according to Jones Lang LaSalle.

Israeli firm joins in Manhattan deal

Another noteworthy deal in progress is New York is SL Green’s sale of its 49.5% interest in 485 Lexington to a joint venture of Gilmore USA and Optibase Ltd., an Israeli technology company. The transaction has not yet closed. The joint venture is paying nearly $21 million and assuming $450 million of existing debt on the building, according to Jones Lang LaSalle.

It is Optibase’s first property purchase in North America and represents the company’s effort to diversify its portfolio by investing in commercial real estate. Once the transaction closes, the joint venture reportedly plans to provide SL Green with a $20 million loan secured by an SL Green pledge to sell an additional 49.5% stake.

“In the last two months, we’ve seen German and Asian investors increase their interest in U.S. investment. Several stateside [sale] closings also are providing some early encouragement that foreign investors are slowly rising off the sidelines for the right opportunities in the best markets,” said Collins.

In particular, coastal markets like New York and San Francisco are drawing interest from select foreign investors. “It seems the German open- and close-end funds and the Asian development companies are getting ready for an investment push in first quarter 2010,” adds Collins.

Washington, D.C. also is proving to be an attractive investment target for overseas buyers. Public REIT Vornado sold 1999 K Street to German investor Deka’s Open Ended Fund for $208 million, or $830 per sq. ft. It is the largest D.C. property transaction in 2009, to date. The property is leased to the law firm Mayer Brown for 15 years.

The last building to trade at that price point was 2099 Pennsylvania Ave, which Jones Lang LaSalle brokered and closed in April 2008. It set a record for District of Columbia office transactions at $867 per sq. ft. Another trophy deal was Credit Suisse’s purchase of 1099 New York Avenue from Tishman Speyer for a reported $90.5 million, or $517 per sq. ft. The building is 61% leased with a major law firm as its anchor tenant

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