Japanese Investors Head for San Diego : Real Estate: They have poured $700 million into the area in the last three years, much of it to finance major projects and buy prime property.
“Sold to the Japanese.”
These days, that same sign could be hung on some of San Diego County’s best-known real estate properties, including the La Costa Resort Hotel and Spa in Carlsbad, the El Cortez Hotel downtown and Coronado’s posh Hotel Meridien.
The San Diego transactions exemplify the growing attraction that Japanese investors have for American real estate, which they perceive as safe and lucrative long-term investment vehicles.
At the current rate, Japanese investment in U.S. properties should exceed a cumulative total of $69 billion next year, up from just $985 million in 1980, according to a study released Friday by Price Waterhouse, an accounting and consulting firm.
Surplus dollars generated by a $52-billion annual trade imbalance that tilts in Japan’s favor and a weak dollar have allowed the Japanese to invest billions into cities such as New York, San Francisco, Honolulu and Los Angeles. But as more and more properties are bought up, those shopping sites won’t be able to accommodate the growing numbers of Japanese “players” much longer, analysts say. As a result, these major investors are now turning to “second-tier markets” such as San Diego.
San Diego, where the Japanese have invested $700 million in the last three years, is now the Japanese’ sixth most-favored market in dollars invested, the study says. San Diego is preceded on the top 10 list by New York, San Francisco, Honolulu, Los Angeles and Washington and followed by Atlanta, Chicago, Dallas and Boston.
“They’re coming down here primarily because of our proximity to a proven market like Los Angeles, where they’ve had considerable success,” said Patricia A. McBride, manager of the West region real estate group at Price Waterhouse. “They view us as a similar market, one that could provide them with a highly valuable commodity--coastal properties.”
Although Japanese attention has been focused on San Diego for only a short time, Japan’s investment power is clearly becoming more evident in the county. Japanese-owned or majority-owned buildings now dot the county’s landscape, particularly downtown.
Aside from the landmark El Cortez, the Japanese are owners or major investors in the $75-million, 20-story Cabot, Cabot & Forbes Corporate Center; the $130-million, 30-story Emerald-Shapery Center, a hotel-office complex, and the $171-million, 33-story, mixed-use Great American Plaza tower, all of which are under construction.
The Japanese also own the 24-story Great American building and the 12-story West Ash Plaza office building, both downtown.
As the Japanese continue to gain familiarity with and knowledge about the U.S. real estate market, San Diego County will be the scene of even greater investment activity, analysts say.
“I would characterize San Diego as a second-tier market, only because of its size,” said Alan Greinetz, managing director of Blackman Flynn & Co., a San Francisco-based real estate merchant banking firm with experience with Japanese investors. “San Diego is simply a smaller city than say Los Angeles.
“But, if you look at San Diego in terms of population and economic growth and how there is an increasing demand for residential and commercial property there, San Diego has to be considered a first-tier market,” Greinetz said.
Japanese investors have also been attracted to San Diego’s West Coast location as a gateway to Pacific Rim nations, said Brian Galligan, real estate development manager for Shimizu America and Shimizu Land. These corporations are the U.S. construction and development subsidiaries of Shimizu Corp., Japan’s largest general contracting firm, which posted revenues of more than $10 billion last year.
Shimizu has been involved in many U.S. commercial projects and is one of three major Japanese financial backers of the $150-million Aventine office project under construction in La Jolla, which includes a Hyatt Regency Hotel.
“And now with the emerging maquiladora industry in Mexico I would anticipate even more Japanese companies doing business in San Diego,” Galligan said.
Indeed, a Japanese shopping frenzy of sorts was witnessed in San Diego’s downtown core earlier this month.
On Oct. 12, the Minami Group, a Tokyo-based conglomerate and hotelier, purchased three downtown blocks, including the historic El Cortez Hotel, and teamed with local developer Grosvenor Industries to propose a $250-million residential and commercial project on the site. The Minami Group is financing 75% of the venture that will showcase a refurbished El Cortez Hotel plus four mixed-use towers.
Then, seven days later, on Oct. 19, Shinryo California, the U.S. real estate investment branch of a Japanese mechanical engineering company, bought a vacant, 55,000-square-foot downtown parcel for $8.25 million and announced plans to construct an office high-rise.
As typified by the Shinryo transaction, many Japanese buyers prefer building or buying office projects, analysts say.
“When the Japanese first started investing in the United States, they were really only interested in attractive, Class-A office buildings with high-quality tenants in premier locations,” said McBride of Price Waterhouse. The Japanese, she added, view such high-profile downtown office buildings that typically have high demand and low vacancy rates as “good collectibles because they pose little risk and are considered prestigious.”
Prominent hotel resorts have also been favored by the Japanese, who say these projects have the same attractive investments qualities as office buildings. According to the Price Waterhouse study, transactions involving office building and hotel-resort properties accounted for more than 70% of Japanese investment activity in the United States last year.
Indeed, the $250-million acquisition of internationally known La Costa Resort Hotel and Spa in Carlsbad by Osaka-based Sports Shinko in 1987 is seen as the transaction that awakened Japanese investors to the potential of San Diego real estate, McBride said.
But, with only a limited supply of major properties, the Japanese are being forced to look for other investment opportunities. Increasingly, the buyers are investing in mixed-use, residential, and industrial properties--all of which can be found in ample supply in San Diego County. “The smaller Japanese players . . . are increasingly looking at residential property, or offices or industrial projects in suburban areas,” Greinetz said.
Already, Japanese investors’ efforts to diversify their investments is becoming apparent. According to Price Waterhouse research, nearly 41% of total Japanese investment in San Diego has been put into hotels and resorts ($283 million), followed by: 32% in mixed-use ventures ($223 million); 14% in office properties ($101 million); 10% in residential projects ($67 million); 3% in industrial ($20 million); and less than 1% in other projects ($5 million).
Tokyu Corp. of Japan, the Tokyo-based conglomerate that is developing the $130 million Emerald-Shapery Center downtown in a joint venture with local developer Shapery Enterprises, said it has no immediate plans to expand into residential or commercial projects.
But Tetsuya Sonobe, chief financial officer of Tokyu’s U.S. subsidiary, San Diego 109 Inc., says such investment possibilities have not been ruled out and adds that other Japanese firms are showing interest in a variety of real estate properties, particularly residential high-rises.
