Doing Business With the Japanese : Real Estate: Concern about foreign investments has yet to prove justified. Most managers of Japanese-acquired properties tell of improvements and prompt attention to upkeep.
At the AT&T; Center in downtown Los Angeles, Mitsui Fudosan (USA) Inc. has added a new lobby and a concierge to help with flowers, theater tickets and other tenant services. At the World Trade Center on Figueroa, Haseko (California) Inc. has sunk $5 million into an entrance of award-winning design and other renovations.
And at the Riviera Country Club in Pacific Palisades, once-wary members now rave about the new menu and improved golf course that Japanese owner Noboru Watanabe has brought to the venerable club.
Japanese purchases of choice American properties have sparked growing fears about foreign ownership among some Americans. Those fears were fanned last week when Japanese interests bought control of the Rockefeller Group Inc. in New York, including Rockefeller Center and Radio City Music Hall in Manhattan, and four skyscrapers in Houston.
But the Americans who manage Japanese-owned properties, lease their office space and frequent their resorts tell a rather soothing story.
By and large, they say, the Japanese make pretty good owners.
“We’ve definitely seen improvements everywhere,” said Laurie Savage, a 13-year member of the Riviera, whose $108-million purchase by Watanabe (no relation to this writer) touched off one of the most emotional responses to a Japanese acquisition in Southern California. “It could certainly end up a much better club for us than what we’ve had in a long time.”
The favorable Japanese record stems from a long-term investment outlook, said Daniel Burstein, New York author of “Yen: Japan’s New Financial Empire and Its Threat to America.”
“They not only pay fair prices for what they acquire, they tend to pay premium prices. They tend to be long-term investors; they do not engage in a great deal of speculative buying and selling,” he said.
“And I think, as a general perception in real estate, they represent quality investors: You’re not going to have a hard time trying to convince them to do necessary repairs.”
Because Japanese investments here are relatively young, having heated up after the re-valuation of the yen in 1985, real estate experts say it is too soon to measure their track record quantitatively. Current occupancy rates, for instance, would reflect lease arrangements with previous owners or market conditions more than any response to Japanese ownership, said Jonathan Marine, a broker with Coldwell Banker Commercial Group, Inc.
Still, the 83.9% average occupancy rate of 18 Japanese-owned office buildings in downtown Los Angeles mirrors the overall downtown average of 84% occupancy, according to figures from Cushman Realty Corp.
It is also difficult to make a broad determination of how much the Japanese are profiting from their investments. Overall, rapid appreciation in real estate has more than justified the premium prices that they initially paid, said Edward Nakata, Coldwell vice president.
“By keeping the properties for long-term hold in areas with restricted supply, like downtown Manhattan and Los Angeles, they’re really keeping supply off the market and realizing a greater value of property if they were to liquidate them,” said Harry Hartnett, research director of Kenneth Leventhal & Co., which has tracked Japanese investment for several years. “They’re very astute investors.”
Mitsui Fudosan, for instance, purchased the AT&T; Center for $79 million in 1979, in what was at the time the largest real estate transaction in Los Angeles’ history. People gasped, but six years later, the firm nearly doubled its money when it sold a 50% interest to Dai-Ichi Life Insurance for $75 million.
Judging by anecdote and opinion, Americans may have less to fear from Japanese owners than they think.
Experts say the Japanese tend to be passive, conservative owners. They tend to handle the bottom-line finances and retain American firms to manage the day-to-day operations. Thus, tenants who have complaints about lighting, security or other problems often still deal with the same management, and management policies are likely to stay the same.
“My experience has shown me that the last thing Japanese want to do is something weird, in terms of being disruptive,” said Terry Tornek, vice president of Haseko, a real estate firm. “As a rule, the Japanese are in it for the long haul. If your whole reason for buying in is to achieve long-term appreciation, the last thing you want to do is screw it up with bad management or inadequate capital investment.”
Some analysts, such as Marine, say Japanese investors still need to learn that the tenant is king in America, compared to the landlord’s market in Japan, where the office vacancy rate in Tokyo’s prime financial district is less than 1%. Others, however, say the Japanese already excel in coddling clients.
Jerry Arca, a vice president of American Telephone & Telegraph, for instance, was taken to dinner by Mitsui Fudosan’s top executives three months ago. “They really have made a conscious effort to get in touch with us and tell us they value us,” he said.
At the Riviera, Watanabe gave several cocktail receptions for club members and presented them with jewelry boxes from Tiffany’s as gifts.
In addition, Japanese investors are usually financed well and don’t flinch at re-investing for needed improvements. They have tended to invest in office buildings that were Class A “trophies” not in need of dire repair. In the resort field, however, Japanese investors have plowed significant sums back into the properties.
In Hawaii, for instance, the cost of refurbishing Japanese resort properties has averaged 25% of the original purchase price, said David Ramsour, chief economist at the Bank of Hawaii. A recent example was a $50-million face lift given the Moana Hotel in Waikiki, a national historic site that Japanese investors restored to its original wooden materials.
“‘Japanese investors are interested in taking properties that American investors would either tear down or don’t maintain, and do an amazing amount of refurbishment,” said Ramsour.
The picture is not all rosy, however. Along Australia’s Gold Coast, Burstein said, some Japanese-owned hotels have hiked rates so high that locals can no longer afford them. Their primary customer is the well-heeled Japanese tourist.
Such rate escalations have not occurred in Hawaii, Ramsour said, where the competition has kept the average room rate at $85. Nor do many tenants of Japanese office buildings complain of rent-gouging in the highly competitive market of Los Angeles office space.
When Mel Katz, owner of PIP Printing in the Arco Plaza, renewed his lease with Shuwa Investments Corp. of California, his monthly rent increased to $1,800 from $1,100. But he called the increase fair.
Among Japanese investors in Los Angeles, Shuwa is one that has drawn some complaints. Many retailers in the Arco Plaza, for instance, are incensed that Shuwa closed five restaurants there within three months of the purchase in 1986. Foot traffic dropped substantially, and some retailers have seen their business dive.
“We see a general ineptness. It’s been very difficult to get any response from the ownership,” said John Mercer, owner of Natick’s Stamps & Hobbies. He said that although he spent $40,000 on renovations and $30,000 on inventory and added baseball cards to his stock, his business has fallen 25% since 1987.
But Tom Gutman, first vice president and regional manager for Tishman West Co., which manages Arco Plaza for Shuwa, said the firm is negotiating with several major restaurant vendors, has undertaken a massive asbestos abatement program, added a parking security system and plans other improvements in lighting and signs at the mall.
“The proof is in the pudding, and the pudding shows a lot is active and happening,” he said.
One of the biggest differences in going from American to Japanese ownership, he said, is adjusting to a lengthy decision-making process. Once the decisions are made, he said: “They are very accurate and the final end product is very good.”
For the typical Japanese investor, maintaining quality “is a matter of pride,” said Sanford Goodkin, national executive director and real estate analyst for Peat Marwick Main/Goodkin Consulting Group in San Diego.
“It’s an attitude of, ‘We want this building to shine, we want people to be proud they’re in it, we want to keep it long term. And we in America tend to be very sloppy about that,” he said.
“Americans are not built for service. Americans are built for capitalism and free enterprise.”
WHERE JAPANESE ARE LANDLORDS
A sampling of prominent properties in U.S. wholly or partly owned by the Japanese.
Price Property (millions $) Owner/partner Inter-Continental Hotels 2,270 Seibu Saison Group Westin Hotels & Resorts 1,530 Aoki Corp. (w/Bass Grp.) Arco Plaza, Los Angeles 620 Shuwa Investment Corp. Exxon Building, New York 620 Mitsui Fudosan 777 Tower, Citicorp Pl., L.A. 500 Mitsubishi Estate Co. Hyatt Regency Maui 319 KM Group Four Oaks Place, Houston 300 Mori Bldg. Dev., C. Itoh, unidentified U.S. group Hyatt Regency Hotel, Chicago 260 Kato Real Estate Corp. 3 First National Plaza, Chicago 254 Meiji Life Insurance Co. La Costa Resort & Spa, Carlsbad 250 Sports Shinko Co. Madison Plaza, Chicago 235 Mitsui Life Insurance Broadway Plaza, Los Angeles 200 Yasuda Trust ABC Building, New York 165+ Shuwa Investment Corp. Union Bank Square, Los Angeles 175 Nissei 444 S. Flower, Los Angeles 147 Meiji Life Insurance 1000 Wilshire, Los Angeles 145 Sumitomo Life Insurance Chase Plaza, Los Angeles 130 Shuwa Investment Corp. Beverly Wilshire, Los Angeles 125 Aoki Corp. Riviera Country Club, L.A. 108 Marukin Shoji Ltd. Paine Webber Building, Boston 107 Shuwa Investment Corp. Dana Point Resort, Orange Co. 104 Tokyo Masuiwaya Calif. Corp. Hotel Bel Air, Beverly Hills 100 Sekitei Kaihatsu
Compiled by Melanie Pickett
