THE JAPANESE LAND RUSH IN AMERICA
Shuwa Investments Corp. had only modest goals in mind when it started dabbling in American real estate in May, 1978.
Operating from suitably obscure headquarters in Baldwin Park, 16 miles east of downtown Los Angeles, the Tokyo-based real estate developer tried high-income housing in Southern California and low-income housing in Northern California. The result was a lot of unsold homes and condominiums.
Hit the fast-forward button to Jan. 20, 1987. Shuwa, boasting a chic downtown Los Angeles headquarters address and with a second office in mid-town Manhattan, runs a kind of corporate “coming-out” announcement in several large American newspapers.
“A landmark year,” the full-page advertisement proclaims. “If you followed the Shuwa Group’s 1986 acquisitions, stay tuned for future developments.” The ad includes photos of the Arco Plaza in downtown Los Angeles and the ABC building in mid-town Manhattan, two recent additions to the Shuwa real estate investment portfolio.
The advertisement, which ran again last week, amounted to Shuwa’s first public boast of the inroads it has made in American commercial real estate in the last two years.
Shuwa has plenty of company from back home. It is part of a pack of cash-rich corporate investors from Japan funneling billions of dollars into blue-chip commercial real estate in the United States.
“They’re the major players now,” said Tim Mason, managing partner in the San Francisco office of Jones Lang Wootten, a British-based investment firm. “It’s quite extraordinary what they have done in the past two to three years.”
Japanese investors--largely corporate real estate investors, banks and insurance companies--bought an estimated $5 billion to $6 billion worth of American real estate last year, a prodigious feat that is likely to be at least equaled in 1987, real estate experts believe. Shuwa alone purchased $1.6 billion worth of property in 1986 and plans to spend an additional $1 billion this year.
The land rush has left American observers gasping because of the high-profile buildings being acquired in major U.S. cities at what they characterize as high prices. In two notable sales last year, Shuwa paid $620 million for the twin-towered Arco complex on South Flower Street, and the U.S. real estate arm of Mitsui paid $610 million for the Exxon headquarters building in New York.
“They’re not looking to buy something on the edge of the center (of town),” Los Angeles attorney David Livdahl said. “They want the center, the real blue-chip properties.”
The Japanese also like hotel properties in Honolulu and elsewhere in Hawaii, where they first began investing more than 10 years ago. Japanese investors are again snapping up prime properties such as the Kona Surf Hotel. Nearly three-fourths of the hotels on Waikiki Beach have large Japanese investment today, according to Paul Brewbaker, an economist at the Bank of Hawaii in Honolulu.
In some cases, Japanese investors are bidding against each other and driving up the prices of already expensive real estate. Some, however, are expressing concern and sensitivity that the rush of purchases might not be welcomed by all.
“I think we should be steady, consistent investors and not in a big rush,” said Ken Miyao, president and chief executive of Mitsui’s American real estate operations, which are headquartered in Los Angeles.
Little Resentment
So far, though, there has been little domestic resentment. Los Angeles is used to real estate investments by outsiders. At least 12 buildings in downtown Los Angeles are believed to be owned by Japanese.
The Japanese are merely the latest wave of foreign investors who have become mesmerized by American real estate. Prodigious amounts of money from the Middle East, Europe, Asia, Canada and Mexico have been funneled into U.S. commercial and residential real estate in the past 10 years.
“The Canadians were a wave at one time,” said Joseph Faulkner, a commercial real estate broker in Los Angeles. “The British were a wave. The Saudis were a wave. And now it’s the Japanese’ turn.”
Fueling the land rush is a combination of factors, but at the top of the list is the appreciation of the yen. The value of Japanese currency has risen about 60% against the dollar since 1985, a move that has made American real estate a bargain basement for Japanese investors.
In addition, commercial real estate prices in Tokyo have soared as foreign companies pour in, looking for office space in a city that has become a world financial center. The higher the real estate prices in Tokyo, the better the land looks in New York and Los Angeles. The Japanese also see the United States as a secure and safe place to invest.
“You don’t have the same investment opportunities in Japan,” Miyao said. “Real estate is so scarce, and the price is too high.”
Shun Usual Mortgages
Japanese investors assess their real estate purchases by measures that are different from typical U.S. standards, from both cultural and investment standpoints. They also typically finance their purchases without using conventional mortgages.
There is also a near-mystical value attached to land in Japan, in contrast with the easy way in which real estate is bought and sold in America. Land in Japan is like a “family treasure,” said Yukuo Takenaka, a Japanese business expert at the accounting firm of Peat, Marwick, Mitchell & Co. in Los Angeles. “You don’t sell property in Japan. It’s the last thing you do.”
“Real estate is a loved and cherished commodity with Asian investors,” added Benjamin Lambert, chief executive of Eastdil Realty in New York. “That’s why it’s so hard to buy a piece of real estate in downtown Tokyo.”
(About 11.6 million people live in the Tokyo metropolitan area on 828 square miles of real estate, while Los Angeles County has about 4 million fewer people living on five times as much land.)
Commercial investments in Tokyo usually yield scant 2% to 3% returns on investment. In Los Angeles and New York, the yields for the same amount of money are two to three times as high. “We think Los Angeles is expensive. We think New York is expensive. But in comparison to Tokyo, they are not (expensive) for the Japanese,” explained Hugh M. Boss, attorney at the Los Angeles law firm of Kindel & Anderson, which has many Japanese clients. “It’s a psychological thing.”
Don’t Mind the Price
As a result, Japanese investors do not mind paying top dollar for their properties as long as they are assured of stable, long-term streams of income. “If they get 5% return on their money, they’re happy,” Los Angeles-area real estate developer Jona Goldrich noted.
Japanese investors are willing to pay as much as 30% above market value for buildings in the prime commercial locations, according to Livdahl, whose law firm of Whitman & Ransom also has a large number of Japanese clients.
“The Americans are kind of shocked at the prices they are paying,” the attorney said. Japanese investors, though, typically believe they are paying fair prices, particularly from the standpoint of their long-term plans. “They are prepared to pay more money because they see long term, not three to five to seven years (like U.S. investors) but 10 to 12 to 15 years,” observed Howard Sadowsky at Julien J. Studley, a national real estate broker and consultant.
Mitsui, for example, purchased a parcel of land in downtown Los Angeles, the site of the old St. Paul’s Episcopal Cathedral, for $4 million in 1979. Real estate sources said the company passed up an opportunity to develop the property with Citicorp and only now is developing a 50-story, $200-million office tower for which ground is to be broken later this year.
In the latest round of purchases, Japanese investors are typically coming in with cash in hand, having arranged their financing independent of the property to be purchased. Shuwa, for example, borrowed $62 million from each of 10 U.S. branches of Japanese banks to buy the Arco Towers.
They are loans made in dollars at an interest rate of less than 7%, according to Takaji Kobayashi, president of Shuwa’s U.S. operations.
Different Strategy
Mitsui’s Miyao explained that Japanese banks generally use a different strategy from U.S. financial institutions to secure their real estate loans.
“In America,” he said, “developers borrow money on a non-recourse basis, where only the property is involved” should the borrower default. In Japan, a real estate loan is made on a corporate credit basis, meaning that the corporation is liable for the debt, he said.
Typical Japanese corporate real estate investors display a blend of caution and thoroughness that turns into aggressiveness and occasional extravagance once they decide to bid on a project.
“Once they make a decision, they go fast and furious,” said Mason of Jones Lang Wootten. “They’re very competitive and they compete with each other just as fiercely. There is no collusion there.”
That kind of fierce competition is a seller’s dream. Four Japanese companies recently bid for an office building in downtown Los Angeles, driving up the sale price to $50 million, 25% above the market price.
Shuwa Investments, whose parent company in Japan is known as Shuwa Corp., bested nine other bidders on the Arco Plaza, a tinted-glass complex built 15 years ago. It was a near-record price for a single piece of U.S. commercial property, said Stan Ross, a Los Angeles real estate consultant.
The major Japanese investments have, until now, been limited largely to commercial office buildings in Manhattan, downtown Los Angeles and San Francisco, with some spillage into areas such as Boston, Beverly Hills, Los Angeles’ Westside and Orange County.
Widening Targets
But the targets appear to be widening. Companies such as Shuwa are already exploring possible investments in Seattle; Portland, Ore.; Chicago; Kansas City, Mo.; Houston; Dallas, and Vancouver, British Columbia.
Shuwa’s American operations are headed by the 34-year-old Kobayashi, a heavy-smoking, boyish-looking executive whose father, Shigeru, founded the firm--Japan’s largest condominium developer--32 years ago. Kobayashi recalled that the company’s track record in America was far from stellar in the early years.
(He commented during an interview in Shuwa’s new headquarters in the Arco Plaza. He often lapsed into Japanese when his English proved inadequate for detailed explanations.)
From 1978 to 1984, Shuwa spent about $25 million building apartments, condominiums, homes and office parks throughout California. The ventures were not overly rewarding, primarily because cultural gaps made it difficult for the Japanese company to market its products.
“We could build this kind of property, but we cannot sell it very well,” Kobayashi said. The company still has not sold all the units in one 99-unit town home development in Orange County, he said. Twenty-nine of the dwellings are being leased.
The Japanese company changed course dramatically in 1985, when it plunged into commercial real estate in a way that was reminiscent of the buying binge by the Canadian firm of Olympia & York in the United States during the 1970s. Olympia & York, based in Toronto, bought eight Manhattan high-rises in one year (1977) for $350 million.
Huge Holdings in Tokyo
Shuwa’s parent firm owns about 60 commercial buildings in Tokyo that have exploded in value in recent years and are now worth an estimated $7 billion to $8 billion. It was the soaring value of those properties that gave Shuwa the capital it needed to finance its U.S. acquisitions.
Shuwa has invested about $2 billion in U.S. real estate since 1985. Among those purchases were 18 valued at $1.6 billion in 1986 and another seven valued at $200 million now in escrow.
The elder Kobayashi began investing in Japanese real estate in the mid-1950s after running a number of businesses, including a ferry service in Tokyo Bay that profited during the Korean War.
He is known as a major innovator in Japanese real estate, having pioneered the concept of condominiums--or “mansions” as they are known in Japan. He also came up with the Ginza “social building” format, in which a multistory building is totally occupied by restaurant and bar tenants.
The elder Kobayashi, now 60, is closely involved in the American operations. “Every day, there is a telephone call,” his son said, somewhat ruefully. “Sometimes, there are three.”
Mitsui Fudosan (U.S.A.), which Miyao heads, is a sharp contrast to the adolescent Shuwa company. In the real estate business for more than 300 years, it first moved into California real estate 15 years ago.
Mitsui also plans more real estate investments in the United States, but its goals for 1987 are relatively modest. It plans to buy $200 million in U.S. real estate this year, about a fifth of what Shuwa is planning.
Mitsui’s U.S. headquarters is in the AT&T; building in downtown Los Angeles, a building that once housed the regional headquarters of Crocker National Bank. Mitsui bought the building in 1979 for $79 million, then sold a 50% interest to Dai-Ichi Life Insurance for $75 million two years ago.
Other Major Investors
Beside Mitsui and Shuwa, other major Japanese investors include Sumitomo Life Insurance, Nomura Real Estate and Dai-Ichi Life Insurance.
Many American developers and brokers are eager sellers to Japanese investors because they pay top prices and they usually pay in cash. “Our phone never stops ringing” with calls from American sellers, Mitsui’s Miyao said.
Goldrich, the Los Angeles developer, is one of those not entirely happy with the new competition. “The danger is we’re going to be owned by foreigners,” said Goldrich, himself a Polish-born naturalized American.
But there seems little danger that the Japanese, despite the high-profile nature of their investments, could have an effect on American real estate equal to that they have had on other American industries.
After all, U.S. commercial real estate is worth a total of about $2.5 trillion, points out Cecil Sears, chief economist of the Urban Land Institute, a nonprofit, industry-funded real estate research group.
Thus, even Japanese investment of up to $6 billion in 1986 is less than 1% of the total market, real estate specialists point out. “The American market is much too big for any one (group) to own,” said Chris Leinberger, a real estate consultant in Beverly Hills.
More importantly, said Takenaka at Peat Marwick’s Los Angeles office, “Money coming in may have hurt the (American) pride in that some properties are owned by Japanese; but at least the money is coming back. If they overpaid, they may have to sell it back at a lower price. Who suffers then?”
Only time will tell how the investments pay off for the Japanese. Takenaka noted some potential problems for Japanese investing in the U.S. real estate market.
“In Japan, you could not go wrong with prime, high-profile properties,” he explained. But “what happened in Japan, will it happen in the United States? We don’t know. The United States is so big, so land is not as scarce.”
