More U. S.-Japanese Ventures Seen : Partnerships Held Beneficial for Local, Asian Investors

Despite trade tensions between the two nations, partnerships between American and Japanese developers or investors are on the rise and provide a rosy forecast for economic growth in both the public and private sectors.

This optimistic view was apparent during Japan-LA Week meetings and in the opinions of decision makers in the real estate development and investment fields reporting on the growing presence of the Japanese investor in U. S. real estate.

John Cushman, president and chief executive officer of Cushman Realty Corp., leading leasing agent for the major buildings in downtown Los Angeles, noted that 20 years ago, 80% of his real estate transactions with foreign interests were with Europeans and only 10% to 15% with Asians.

“Now the situation has been reversed, 80% of our real estate transactions are with Asians, and primarily with the Japanese,” he said.

Another emerging trend is a reinvestment of real estate profits in the United States by the Japanese investor.

Partnership Program

“The Japanese are not only vying to buy existing buildings but are also developing new projects,” said Frederick A. Schnell, executive consultant for economic development for Mayor Tom Bradley, referring to the city-sponsored Japan-Los Angeles Partnership Program for Real Estate Development and Investment. “And Los Angeles stands to reap considerable benefits from collaborative effort.”

Because of increased investment by the Japanese, the accounting firm of Kenneth Leventhal & Co. of Century City has completed a special study resulting from recent trips to Japan by its partners, Kenneth Leventhal, Jack Rodman and Stanley Ross.

The study indicates a 36% investment by Japanese in Hawaii, with the interest focusing primarily on hotel acquisition; 29% in California, 17% in the New York, Washington, Boston areas and 6% in the South (primarily around Atlanta).

“California’s commercial properties are especially appealing to the Japanese, with offices ranking first, followed by industrial parks and mixed-use projects. Real estate, as a whole, offers an exceptional bargain,” said Rodman, managing partner of the Los Angeles office of the certified public accounting firm.

Drop Against the Yen

The partners met with representatives of about 40 Japanese companies, whose corporate assets exceed $800 billion, and tracked down the Japanese investment rate in the U. S. from 1980 through 1985.

“The drop in the dollar against the yen over the last two years has given the Japanese almost a 50% increase in buying power and a valuable inflation hedge. Cash-on-cash returns here at 5% to 8% are more than double those in Japan at 2% to 4%,” Rodman explained.

Japanese investments in the United States real estate market have grown from $1.5 billion in 1985, to $6 billion in 1986, he said, and the study indicates that investments for 1987 will reach $12 billion.

“Projecting well into the future, and based on Japanese investments in the United States in 1980 of $5 billion--as compared to $19 billion by 1985--if the present rate of increase continues, one could expect that investment figure to be $69 billion by 1990,” Rodman said.

Patient Investors

“The Japanese are providing the deep pockets that many developers have been praying for, but the real message we’re trying to put across is that they also make excellent joint-venture partners.

“They are patient, interested in long-term investments, they bring in the money and a view that is stable and not speculative, as was seen in previous waves of foreign investment.

“And, even though U.S. builders are protesting the longer property depreciation period (which increased from 19 to 31.5 years under the tax change), the Japanese find it much more appealing than the lengthy 65-year depreciation in their country.”

Referring to local concern and some antagonism toward the Japanese for the dramatic takeover of U. S. landmark buildings in key cities, Ross said the joint venture with the U. S. developer would help to solve such problems, and that collaboration in new projects with American corporations could prove more rewarding than acquisition of existing buildings.

Normal Vacancy Rates

The public accounting firm’s study suggests that 1987-1989 could be considered a period of investment selection and preparation, that construction could be done during 1989-1990, with successful results projected by 1990-1991, when excess of U. S. and other commercial space would be absorbed and vacancy rates would once more return to normal levels.

The forecast is that an investors annual return could yield 11% to 13%, Ross stated.

Phillip R. Nicholson, a partner with Cox, Castle & Nicholson, a leading real estate law firm, also compiled significant information while on a trade mission to Japan, sponsored by the Los Angeles County Economic Development Corp.

The Japanese perceive Los Angeles as the place to be since it is where most of the Pacific Basin business is to be transacted in the future,” Nicholson said, adding that the Japanese may be paying a higher price for properties, but their approach ultimately may be prophetic as their presence here places even more focus on Los Angeles as a world trading and financial center.

“Other countries will follow this lead and local economy will benefit as a result.”

He said that compared to the Tokyo area, where there are extraordinarily high land prices ($18,400 for one square foot in the Ginza), Japanese investors see Los Angeles as a relatively inexpensive real estate marketplace.

Lower Financing Rates

Japanese financial institutions can subsidize the construction of new projects at rates below what is generally available in the United States, Nicholson added.

“In order to take better advantage of the market, we are seeing a continuing trend toward joint ventures between Japanese investors and financial institutions on the one hand, and the local American developers on the other,” he said.

“This enables the Japanese to learn about the development business, see where mistakes might be made and duplicate successful development patterns, such as they have done in the auto and high-technology industries.”

One of the most significant competitive advantages for Japanese developers and contractors is their ability to bring relatively low-cost capital to the bargaining table.

Japanese Bank Competition

Japanese banks are coming on strongly in U. S. real estate financing and are competing more with U. S. banks in financing American developers and real estate investors, the attorney stated.

Nicholson reported that there are also specific opportunities for the County of Los Angeles through its relationship with the Japanese financial institutions.

“Los Angeles County may be able to raise as much as $1 billion in yen this year on the Japanese bond market, assuming that the Japanese offer a good deal to the county.

Cox, Castle & Nicholson, with Los Angeles and Newport Beach offices, specializes in real estate, litigation and construction industry transactions with major domestic and international, lenders, tenants and investors.