Responding in part to increasing criticism of their U.S. real estate purchases, Japanese investors cut back on their 1989 investments, causing the first drop in their explosive rate of spending in five years, according to a report released Monday.
The study by Kenneth Leventhal & Co., an accounting firm that specializes in real estate, also revealed a big increase in residential development projects mostly in Southern California. Investments in hotel and resort properties exceeded office buildings, where investment showed a sharp drop.
Japanese investment in U.S. real estate in 1989, which included Mitsubishi Estate Co.'s buying a 51% stake in Rockefeller Center, declined 11% to $14.77 billion from a record $16.54 billion in 1988, according to the study by Leventhal. Cumulative Japanese real estate interests reached $57.65 billion by year's end, up from $42.88 billion in 1988 and the equivalent of about 2% of the U.S. commercial real estate market.
"This is the first year in five years we see a decrease in the amount of investment by the Japanese," explained Jack Rodman, managing partner of the Los Angeles office. He attributed the slowdown to a number of factors.
Those factors included increasing Japanese investment in Western Europe as well as the Japanese economy and the fact that the largest U.S. "trophy properties" have been acquired all ready.
"I think to a certain extent, the slowdown reflects their sensitivity to the acquisition of symbolic or national assets like the Sears Tower or Rockefeller Center," Rodman said. "One of the largest groups to reduce their investments were Japanese life insurance companies, which are closely regulated by the Ministry of Finance, which had advised Japanese companies to be cautious."
As a result, Japanese investment in office buildings fell to $3.33 billion in 1989 from $8.32 billion the year before. Aside from "the Japanese concern about negative publicity," added Jack Barthell, a Leventhal partner. "U.S. institutions also have been outbidding Japanese investors for many properties that have been available." However, on a cumulative basis, 44% of all Japanese real estate investments are in office properties.
Investments in U.S. hotel and resorts totaled $4.16 billion in 1989, up from $3.58 billion.
In Orange County, the biggest known Japanese purchase last year--and what is believed to be the biggest Japanese purchase in the county ever--was the oceanfront Dana Point Resort, sold for $104 million. It was also one of the largest real estate deals in Southern California last year and one of the highest prices on record for a U.S. hotel.
The greatest shift in preferred property types, however, was to residential development properties, which totaled $2.22 billion. That was triple the amount invested in 1988 and accounted for 15% of total Japanese investment in U.S. real estate in 1989, contrasted with only 4% in 1988. The study tracked resident projects, but does not include purchases of single homes by individual Japanese investors.
Nearly two-thirds of the residential investment was concentrated in California. "There has been a huge increase in residential development mostly in joint venture with U.S. development companies. . . . We believe that Japanese equity may make up for the loss of equity due to the problems with the savings and loans," Rodman said. "It is estimated 50% to 60% of housing development in Southern California was financed by the savings and loan industry. With savings and loans in crisis and new regulations limiting their investment there will be a huge shortfall."
The study showed Japanese purchases of raw land jumped $1 billion in 1989, with more than two-thirds of these acquisitions in Hawaii for planned hotels and resort developments.
Leventhal is projecting Japanese real estate investment in 1990 to range between $13 billion and $16 billion. With the first wave of investment by Japanese life insurance and other large companies peaking, Rodman said, "We are seeing a decisive shift in the type of Japanese investor--a second wave created by swelling numbers of development firms, smaller investors and non-real estate companies."
He added that investments from Taiwan, Hong Kong, South Korea and Australia and some European countries such as Sweden will account for a continued flow of foreign capital into the United States.
The study also revealed that the size of the Japanese deals declined to an average of $50 million, although the actual number of transactions were up.
In Orange County, the Japanese are increasingly getting in on the ground floor, either by constructing their own buildings or forming joint ventures with local developers to erect buildings. They are even making construction loans.
The Japanese made a number of major purchases in Orange County in 1989. Two were office buildings, but the other two were a hotel and a collection of industrial buildings. The Japanese and other Far East investors also bought heavily in the county's apartment market last year, primarily because sky-high home prices have boosted demand for rental properties, experts said.
There was a shift in Japanese investment in the county last year. In 1988, U.S. pension funds bought several large office buildings that were sold for sums exceeding $50 million, while the Japanese concentrated on smaller buildings in the $5-million to $25-million range, said Joseph A. Leon, an investment specialist at Coldwell Banker Commercial Real Estate in Newport Beach.
In 1989, however, the pension funds avoided big office deals, fearing that the office market here is overbuilt. Japanese real estate investors tend to take a long-term view of real estate investment rather than a more American view of looking for short-term profits, Leon said. Japanese investors can also borrow money at cheaper rates in Japan than their U.S. counterparts.
The Dana Point Resort was purchased by Tokyo Masuiwaya California Corp., the U.S. investment arm of Japan's largest kimono maker. The sellers were the Slatkin brothers--Edward and Thomas--whose family owned the Beverly Hills Hotel. About a year earlier, the Slatkins had paid just $65 million for the 350-room hotel on 12 acres.
The second-largest sale in the county was the 11-story Transamerica and five-story Marine National Bank buildings on Von Karman Avenue in Irvine near John Wayne Airport, containing 331,000 square feet of office space. The 4-year-old buildings were sold by Newport Beach developer Koll Co. and Transamerica Insurance near the end of last year for $82 million. Buying was a group of Japanese banks and insurance companies called World Trade Center Building Group, which formed originally to make office investments in Tokyo.
The third-largest sale involved The Atrium--two 10-story office towers linked by a glass-enclosed lobby near John Wayne Airport--that sold for $80 million to Hoyogo Real Estate USA Inc., described as a Japanese real estate syndicator.
Selling the 3-year-old buildings, with 336,000 square feet of space, was French & McKenna Co.
And in one of the largest sales of industrial property in California last year, the Koll Co. sold 24 industrial buildings around Southern California for $138 million to Japanese developer Fujita Corp. USA. About half the buildings were in Orange County, but the price wasn't broken down by geographical area.
JAPANESE REAL ESTATE INVESTMENT IN O.C. IN 1989
Rank Property Location Buyer 1. Dana Point Dana Point Tokyo Resort Masuiwaya California 2. Transamerica Irvine World Trade and Marine Center Building National Bank Group 3. The Atrium Irvine Hoyogo Real Estate USA 4. 24 Koll Co. Orange County Fujita industrial and Southern Corp.USA buildings California 5. State College Anaheim Tobishima Plaza Development Co. and Hutton Development Co. 6. 11-story office Irvine Joint venture tower of Zenitaka in Koll Center Corp. and Irvine the Koll Co. 7. Industrial Santa Ana Haseko /office (California) building Inc. 8. Pierside Pavilion Huntington Beach Joint venture with California Resorts International Inc. and Haseko (Calif.) Inc.
Rank Price 1. $104 million 2. $82 million 3. $80 million 4. $138 million 5. $19.7 million 6. $50 million 7. $11 million 8. $23 million
Source: Los Angeles Times files
JAPANESE INVESTMENT IN U.S. REAL ESTATE
INVESTMENT BY PROPERTY TYPE
1987 total in 1987 % 1988 total in 1988 % Property type millions of $ of total millions of $ of total Office $ 5,190 41 % $ 8,310 50 % Hotel/resort 4,570 36 3,577 22 Mixed use 740 6 2,416 15 Residential 1,300 10 702 4 Retail 460 4 644 4 Industrial 30 - 310 2 Land 470 4 302 2 Golf course 10 - 202 1 Other - - 81 - TOTAL $12,770 100 % $16,544 100 %
1989 total in 1989 % Property type $ in millions of total Office $3,331 23 % Hotel/resort 4,158 28 Mixed use 2,184 15 Residential 2,216 15 Retail 350 2 Industrial 305 2 Land 1,321 9 Golf course 394 3 Other 517 4 TOTAL $14,775 100 %
Source: Kenneth Leventhal & Co.
Note: Totals may not add up to 100% due to rounding
Total new annual investment in billions of dollars. 1989: $14.77 billion, down 11% from 1988.