Japan's Yen for S.D. Grows Stronger


Lured by relatively low prices, a mild coastal climate and a healthy economic environment, Japanese investors last year spent $1.1 billion on San Diego real estate, making the city the third most popular spot nationwide for Japanese real estate investment.

Measured in total dollars spent, San Diego's appeal to Japanese real estate investors has more than doubled since 1988, when they paid a total of $421 million for San Diego real estate, ranking it 11th among U. S. locales. Now only Los Angeles and New York attract more Japanese dollars than San Diego, according to a report released Monday by Kenneth Leventhal & Co., a certified public accounting firm.

"It's the economy, increasing employment and increasing population," said Mitchell Ellner, a partner in Kenneth Leventhal's San Diego office, in explaining the area's appeal. "The demographics of San Diego are such that it's considered an enduring market."

Because San Diego had such a small role in the initial wave of Japanese investment dollars that began pouring into the country in 1985, the city has traditionally been considered of secondary interest to foreign investors. But the recent survey shows how much that perception has changed, Ellner said.

Some of San Diego's popularity can be traced to its proximity to Los Angeles, which has begun to offer fewer investment opportunities, analysts said. The tourist industry, the Tijuana maquiladora program and even the America's Cup yacht race have had a hand in making San Diego an attractive investment area for foreign investors, they said.

Los Angeles still attracts the largest amount of investment capital from Japanese funding sources, but "there are now limited opportunities in Los Angeles and there's perceived to be more growth potential in San Diego," said Robert Fox, vice president of TSA Development, a San Diego development firm backed by Japanese investors. "It's a city on the go."

Only Las Vegas saw a higher percentage increase in Japanese investment dollars in 1989, the Leventhal report says. Japanese investors spent $482 million in the gambling capital in 1989, contrasted with $22 million the year before.

"What the Japanese are doing is filling a void since the U. S. sources for real estate money are drying up," said Paul Devermann, senior vice president of the San Diego Economic Development Corp., a private, nonprofit organization that helps creates jobs and industrial development in San Diego County. "The Japanese are coming in and taking their traditionally longer view, buying these properties with hopes of payoffs in five or 10 years out."

Although most analysts said the Japanese interest in San Diego real estate was a boon to local development, some observers were cautionary about the effects of too much foreign investment.

"On the good side, it brings new money into our economy and brings along development that may not have otherwise happened. It helps add to the redevelopment of downtown and helps bring new stock to our community," Devermann said.

But he added: "On the downside, it has the effect of being inflationary. Foreign investment has the tendency to drive up the prices of some of the properties more rapidly than they would have otherwise (risen). It makes it more expensive in the long term for some development to occur."

Last year, Japanese investment capital was spread among some 20 real estate developments in San Diego, nearly half of which were mixed-use properties, which combine hotel, office and sometimes even retail space in one development project.

The largest of the San Diego mixed-use properties acquired by Japanese-funded partnerships last year was the El Cortez hotel redevelopment project in downtown San Diego. The project has an estimated value of $250 million and will eventually include office and retail space.

About 18% of the total amount of Japanese investment capital spent on San Diego real estate went into strictly hotel properties, while another 18% went into residential developments, the study shows.

New construction projects made up two-thirds of all Japanese-funded development in San Diego, with Japanese developers and construction companies contributing about 75% of all Japanese investment capital. In most instances, Japanese investors entered the market in joint ventures with U. S. real estate developers.

The study does not disclose the amount of capital contributed by Japanese investors in particular joint-venture or partnership developments. In those cases in which the amount of money contributed by Japanese investors could not be reliably ascertained, the study used the total value of the joint venture "on the assumption that, without the Japanese financial backing, the deal would not go through," the report says.

In addition to the El Cortez development, the next four largest San Diego real estate properties on which Japanese investors spent their yen in 1989 include:

- A 922-unit apartment complex on Renaissance Avenue in La Jolla, valued at $140 million.

- Great American Plaza, under construction in downtown San Diego, worth $170 million.

- Four Seasons Hotel, part of the Aviara Resort in Carlsbad, worth $100 million.

- Le Meridien Hotel in Coronado, valued at $87 million.

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