The Japan that seemingly couldn't say no to a U.S real estate deal as little as two years ago lost its appetite in a big way in 1991, as Japanese investment in U.S. properties plunged 61% to the lowest level since 1985.
The figures, released Thursday by the Los Angeles accounting firm Kenneth Leventhal & Co., dramatize the toll taken on Japanese real estate investors by higher interest rates in Japan, the sagging stock market there, tighter lending restrictions for Japan's banks and the moribund U.S. office and hotel markets.
"The buying binge is over," said Jack Rodman, director of the firm's Pacific Rim practice.
The Leventhal study estimates Japanese investment in U.S. real estate last year at $5.06 billion, down from the $13.06 billion spent in 1990. The peak year for Japanese investing was 1988 when they spent $16.54 billion on U.S. properties.
The drying up of Japanese real estate money in California was even more dramatic. Total investment tumbled 83% to $976 million, a trend the study attributes to the state's steep recession. For the first time in four years, Hawaii attracted more Japanese real estate money than California. Los Angeles was eclipsed by both New York and Honolulu as the city of choice for Japanese real estate funds.
Japan's sudden loss of appetite for U.S. real estate also hit home in San Diego County during 1991.
Japanese real estate investment in San Diego County fell 87% to $138 million, according to Mitchell Ellner, a partner in Leventhal's San Diego office. Despite that drop, the county remained the fourth most popular location for Japanese investment, behind New York, Honolulu and Los Angeles.
The results signal an end to a shopping spree that began in 1985 when cheap capital, the yen's exceptionally strong buying power and loose lending standards by Japanese banks prompted scores of Japanese to pay record prices for some of the most famous office buildings and hotels in California, New York and Hawaii.
Before the mid-1980s, foreign buyers of U.S. property were primarily British, Dutch, Middle Eastern and Canadian, who were especially active in buying real estate properties in the 1970s. But as Japanese wealth grew in the 1980s, they became the biggest buyers and still are.
Since the mid-1980s, Japanese investors have pumped more than $3.1 billion into San Diego real estate, Ellner said.
Their presence triggered widespread public fears that savvy Japanese investors were on an unstoppable mission to acquire the most prized U.S. properties. Now, some of Japan's most visible U.S. real estate investors are caught in a tight financial vise, dramatically illustrated by the announcement Wednesday that Japanese financier Minoru Isutani is selling the prized Pebble Beach resort in Northern California to another Japanese company at a loss of nearly $350 million.
Leventhal officials predict Japanese banks that financed many of the office and hotel purchases will be forced to restructure deals with their borrowers. But they add that despite the growing financial problems some Japanese property owners face, there is no evidence that Japanese investors are in full-scale retreat from the U.S. market. Little of the $76 billion in real estate the Japanese bought since 1985 is being sold.
Real estate experts also cautioned against drawing the conclusion that Japanese real estate investors are faring worse than their American counterparts, even though many of them bought property at the market peak from 1988 to 1990. They note that the nation's merciless real estate slump--caused by overbuilding, the slowing economy and a drying up of credit--has hammered a wide range of U.S. real estate tycoons as well, among them Donald J. Trump, Edward J. DeBartolo and John Portman.
"The Japanese were no dumber than the Americans," said Anthony Downs, a real estate expert at the Brookings Institution in Washington, D.C.
Still, Japanese investors in Los Angeles, where they own about 45% of the premium downtown office space, have been especially hurt. Rodman said recent appraisals of premium downtown space shows that building values have fallen from 20% to 30% since the late 1980s.
He said many buildings were bought at a time then when rents were roughly $24 a square foot and seemed to be heading toward $30 to $40. Now, rents typically range from $12 to $18 a square foot, frequently reflecting generous concessions owners now must offer to lure new tenants. The impact the softer Los Angeles office market is having on Japanese investing is shown by the 65% drop last year in investment in the area to $590 million last year.
The study predicts Japanese investment in U.S. real estate in the next few years will range from $3 billion to $5 billion annually. It adds that recent moves to ease lending restrictions by Japan's Ministry of Finance that had been tightened in 1990 could boost the flow of investment money to the U.S., as could an improving U.S. economy.
But the study says less Japanese investment will go into so-called "trophy" office buildings in large cities. Rather, most of it is expected to flow increasingly into two areas: building homes and apartments and completing previously planned projects such as resorts.
That also was the case in San Diego, where "a substantial portion of Japanese investment in San Diego last year represented incremental contributions to projects that had been started in prior years," Ellner said.
Money that wasn't invested in existing projects was directed almost exclusively "in residential developments and land that can later be built out with housing projects," Ellner said.
While that trend toward residential investments was apparent elsewhere in the country, it was especially noticeable in San Diego. "Residential and land (acquisitions) accounted for 27% (of last year's investments) on a national basis," Ellner said. "Here, it was substantially all of their investment."
Leventhal partner Jack Barthell said the backlash triggered by Japanese investments in such well-known properties as New York's Rockefeller Center, Pebble Beach and the Biltmore Hotel in Los Angeles now seems to be giving way to concerns that Japanese investment may dry up even more, further straining the cash-strapped real estate industry.
Rodman added that the real estate slump has caused Japanese investors to take a more rational approach to their real estate purchases. That means emphasizing buildings and hotels with a healthy flow of cash from rents rather than buying buildings and betting that someone will come along later to buy the building at an even greater price.
The study notes that the $5.06 billion invested last year nationwide by the Japanese was boosted by one transaction: $622 million in real estate acquired by Japanese industrial concern Matsushita when it completed its $6.6-billion acquisition of entertainment conglomerate MCA last January.
Elsewhere in California, Japanese real estate investment fell 74% in San Francisco to $127 million. Japanese investment in Orange County, once one of the top 10 locations in the country, fell 95% to $32 million.