The Japan that rarely said no to a U.S. real estate deal as little as two years ago lost its appetite in a big way in 1991, as new 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 New York and Honolulu as the cities of choice for Japanese real estate funds.
Orange County, once one of the top 10 locations in the country, fell 95% to $32 million. Los Angeles dropped 65% to $590 million as a city of choice for Japanese funds. Japanese real estate investment fell 87% to $138 million in San Diego, and 74% in San Francisco to $127 million.
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.
Their presence triggered widespread 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 financial vise, dramatically illustrated bythe 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 predicted that Japanese banks that financed many office and hotel purchases will be forced to restructure deals with their borrowers. But they added 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 have 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 Japanese bought property at the market peak from 1988 to 1990. The analysts noted 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 Brookings Institution real estate expert in Washington.
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 such space shows that building values have fallen from 20% to 30% since the late 1980s.
He said many buildings were bought when rents were about $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 must offer to lure 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 Leventhal study predicts that 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, which had been tightened in 1990, could boost the flow of investment money to the United States, 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 planned projects such as resorts.
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 seems to be giving way to concerns that Japanese investment may dry up even more, further straining the cash-strapped real estate industry.
Rodman said the real estate slump has caused Japanese investors to take a more rational approach to their 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 to buy the building at a 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 in January, 1991.
LOW-SKILL, LOW-WAGE JOBS
Japanese firms in California pay less, UCLA study says. D1
Declining Investment in U.S.
New investment in U.S. real estate by the Japanese declined 61% in 1991 from 1990. For Orange County, the drop was 95%. U.S. (In billions) 1987: $12.8 1988: $16.5 1989: $14.8 1990: $13.1 1991: $5.1 O.C. (In millions)1987: $174.9 1988: $506.0 1989: $620.8 1990: $626.3 1991: $32.0 Source: Kenneth Leventhal & Co.