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Foreign investors — from Korea, Israel, China and Germany — are buying up office buildings in D.C. at twice the pace of last year. Middle Eastern sovereign wealth funds are financing a major mixed-use project and a convention center hotel that’s under construction downtown. Kojo explores what a boom in foreign investment means for the D.C. real estate market and the city.
- Jonathan O'Connell Reporter, The Washington Post
- Stephen Collins Head of the International Capital Group for the Americas and Capital Markets for the Mid-Atlantic at Jones Lang LaSalle
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. Have you seen the fancy new CityCenterDC opening this fall, six blocks east of the White House? It took a major investment from the tiny Persian Gulf nation of Qatar to get the project started. And that new Marriott Marquis going up at the DC Convention Center? The primary investor is the sovereign wealth fund of the Middle East nation of Abu Dhabi.
MR. KOJO NNAMDIAcross the city, foreign investors are funding major development projects and buying existing office buildings in growing numbers. Some of that money comes from sovereign wealth funds that invest government money for countries like Norway and Qatar. Some comes from investment groups in countries like Korea, China, Germany and Saudi Arabia that want a safe place to park their cash and earn predictable returns.
MR. KOJO NNAMDIExperts say Washington is one of the hottest commercial real estate markets in the world right now for foreign investors. Joining me to look at what that means for the city is Jonathan O'Connell. He covers development and commercial real estate for The Washington Post and Capital Business. Jonathan, good to see you.
MR. JONATHAN O'CONNELLThanks, Kojo.
NNAMDIAlso with us in studio is Stephen Collins. He's the head of the International Capital Group for the Americas and the head of capital markets for the Mid-Atlantic at Jones Lang LaSalle, a real estate services firm. Stephen Collins, thank you for joining us.
MR. STEPHEN COLLINSThanks for having me.
NNAMDIYou, too, can join the conversation. Give us a call at 800-433-8850. What do you think about the boom in foreign investment in D.C. commercial real estate? 800-433-8850. You can send email to email@example.com or shoot us a tweet, @kojoshow. Jonathan, you wrote about this boom in foreign investment. What do the numbers tell us about overseas investors snapping up office buildings and buying into big development projects in Washington?
O'CONNELLI think it says that when you look at investments that are available worldwide, buying an office building in downtown Washington looks pretty stable compared to what else is out there. And with all the volatility in markets and, you know, various countries having to bail out their own economies, there's just fewer places in the world now where you can find something.
O'CONNELLYou have a pretty good idea what the return is gonna be for the next 20, 30 years. And, you know, when you have a building in downtown Washington that is fully leased to a, you know, a law firm or some other really credit-worthy tenant, you have a good idea what the rent is gonna be there for a pretty long time, what that building might be worth going forward. Whereas, you know -- and I think Washington is distinct from a lot of other parts of the country in that way in that our economy came back quickly.
O'CONNELLOur real estate values came back very quickly. And with the federal government being here, there's an expectation that the real estate market here will be strong coming out of the recession compared to a lot of other parts of the country. So you see people -- and that's kind of an addition to the prestige sometimes of being in Washington. So you see people from other countries. Maybe they've already been here before on international business.
O'CONNELLAnd they see the numbers for Washington, and they think that that -- this is a place where they wanna be. This is a place where they want to sort of drop their flag.
NNAMDIJonathan reported that nearly $1.9 billion in Washington office properties so far this year have been -- has been purchased by overseas investors. That tops the total of $1 billion for all of last year and more than doubled the $807 million that foreign investors put up in all of 2011. Steve, can you explain what foreign investors are looking for in terms of transparency and predictability? What makes the U.S. a good place to put money compared with other parts of the world?
COLLINSThere's a few -- reports are out. One, which is the Jones Lang LaSalle transparency report, and it denotes 80 different topics that will gauge a transparent nation or investment vehicle, and the U.S. is number one. U.K., Reed London is number two, and Australia is number three. And so when you're an investor and you're looking to get your money out and you want to have it in a safe haven, the tax laws, the market dynamics all make it much easier for an investor from overseas outside the country to get the money out, and they know it's gonna be in a safe spot.
NNAMDIHow does it compare to places like, oh, Canada?
COLLINSWell, the issue with Canada, it's a very -- also a very transparent country. But the issue with Canada is there are some few players and so few buildings available, and it's almost like a Monopoly game where the big players trade the buildings back and forth. It's very hard to get into that market.
NNAMDIThere's also a lot of transparency, it's my understanding, in Australia.
COLLINSAustralia is the number one -- third in the transparency report. But, again, it's a very small market. You could fit Australia in a corner of midtown Manhattan.
NNAMDIHow -- why is Washington so appealing apart from some of the factors that Jonathan already mentioned to foreign investors now? How much of that appeal is the cache of owning a prominent building in the capital of the United States?
COLLINSYou know, when you look at the investors, what they're -- foreign investors -- what they're looking for, they're looking for stability. But they're also looking for a market dynamic that has an ability not to produce more assets for lease or for sale. So Washington, D.C., has a very finite market, you know, Massachusetts Avenue, Pennsylvania Avenue, to the Capitol, to Georgetown. So that is very attractive to these investors, as well as world-class developers, both regional and national, that are here.
NNAMDIYou say, Jonathan, that some of these investors are very mathematical- and finance-oriented. They see here the best return for their investment dollars?
O'CONNELLThey sure, and probably Steve could speak to that a little bit. But if you're comparing making a real estate investment to investing in another commodity or trying to get a certain yield on, you know, a large amount of money that you have maybe over-invested in another product, you know, real estate is a good way to gather that and to diversify your portfolio. And if you -- particularly if you want sort of a predictable yield over a long period of time, that's when you would kind of lean forward, like occupy a downtown office building.
O'CONNELLNow, some other people are looking for maybe more aggressive returns, and that's when you start talking about development projects, right? And they're taking on more risks. So CityCenter, sovereign wealth fund deciding they were -- from Qatar they were gonna put up some $700 million. They didn't know at the time whether when the building was complete if law firms would lease space there, if people rent the apartments, if people buy the condos.
O'CONNELLSo they're making sort of a bit more of a risky bet. Same thing with -- you know, we have the Southwest Waterfront right now that people would like to get started building. The developers of that project are looking for money. And, you know, they're -- hopefully, we're going to find some large investor willing to take a little bit more risk and say, yes, I do believe in that project. I think when that hotel gets built, when those office buildings are built, when those apartments get built, that people are gonna want to come there.
NNAMDIIn case you're just joining us, that's Jonathan O'Connell. He covers development and commercial real estate for The Washington Post and Capital Business. He joins us in studio, along with Stephen Collins. Steve is the head of the International Capital Group for the Americas and the head of capital markets for the Mid-Atlantic at Jones Lang LaSalle, a real estate services firm.
NNAMDIYou can call us, 800-433-8850. How do you feel about the sovereign wealth fund of Qatar owning a big share of CityCenterDC? 800-433-8850. Don your headphones, gentlemen, so we can hear from Peter in College Park, Md. Peter, you're on the air. Go ahead, please.
PETERHi, Kojo. I was wondering if your guests -- the influx of foreign money could create an asset bubble in D.C. housing.
NNAMDICould create an asset bubble in the D.C. housing market?
PETERPrice bubble, I mean.
NNAMDIA price bubble. Steve?
COLLINSWell, a price bubble, no. I think you look at these investors and what their horizons are, there used to be a concern back in the late '70s that the Japanese were gonna come in and buy these assets and buy up United States. They're gone, mostly, by and large. These investors have time line horizons.
COLLINSThey buy and they sell based upon the returns. They have to show return back to their investors, which is, you know, sovereign wealth fund, the government. So I don't think you're gonna see a big bubble burst and then prices go back down. I think you're gonna see the -- this steady rise slowly over the years.
NNAMDIWell, I remember Jonathan O'Connell writing about when he was single and was living in an apartment and, when he had to move into a house, what the difference was. But I don't know if that was the result of any kind of bubble. Jonathan.
O'CONNELLI think there's a flip side to that also, which is that if there is -- continues to be interest in investing in Washington development projects, meaning building new things, if foreign investment is willing to put up money to build hundreds of new condominiums in this town, then potentially that could even drive down the cost of condominiums at some point, right? If we add another couple of hundred condominiums at Southwest Waterfront, a few more at Hine Junior High School, you know, around the region, in some way that can potentially make more condos available to people.
NNAMDISteve, what other American cities are in competition with Washington for these foreign investments?
COLLINSNew York City is one. San Francisco is another. What you're seeing is most of these foreign investors are looking for the gateway markets. So they're looking for New York, Boston, Washington, San Francisco, Los Angeles. But the returns are starting to be driven down. So they're starting to look at other markets: Seattle, Denver, Houston and Chicago. We've had quite a few international buyers in Chicago recently because of the returns.
NNAMDIJonathan, one of the biggest foreign investments in the District that we've been talking about comes from Qatar, which put $600 million into CityCenter. Can you describe the retail, restaurant and residential mix in that project? And tell us a little bit about its history.
O'CONNELLSure. The first phase of CityCenter is six buildings, two of them office buildings, two of them condominium buildings and two of them apartment buildings. Longtime Washingtonians will know this location as the site of the old Washington Convention Center, which didn't last very long, was never even really considered a success.
NNAMDIWas never really that old, but go ahead.
O'CONNELLExactly. Very good point. Only lasted for 30-some years, I think. And it's been really a decade-long effort to try to figure out what to replace the convention center with. So, you know, initially, people viewed CityCenter as a downtown mixed-use project that would make downtown vibrant. The kind of interesting thing is it's taken so long that it's now sort of the last piece of a vibrant downtown because we now have people living downtown in many other locations.
O'CONNELLWe have dozens of new restaurants all over the place. It's kind of more of a 24-hour city than it ever was when they were planning the CityCenter. So CityCenter is now gonna land, when it opens in the fall, in the middle of a very vibrant Penn Quarter neighborhood. And, you know, the retail -- all six of those buildings will have retail on all sides of them. So we're talking about a tremendous amount of shopping coming downtown.
O'CONNELLAnd I think the big hope of the city government and other developers is that CityCenter will return downtown as a destination shopping place, just as it used to be when the big department stores were downtown. People were driving from the suburbs to shop downtown. The hope with CityCenter is if they can deliver some of these big names, if they can deliver an Apple Store, if they can deliver high-end fashion, a number of things we don't have in Washington otherwise, that downtown will be a destination again.
NNAMDIHow did this relationship between the CityCenter developer Hines and the sovereign wealth fund of Qatar come about? That didn't just happen overnight, did it, Steve?
COLLINSNo. Hines, being a world-class developer -- and by the way, most people think of Hines as being in the U.S., based in Houston, but they've developed buildings in China. They've developed buildings in Moscow, all over Europe. They're very active. And they have -- actually have an office over in the Middle East, and they have been pursuing foreign investors for their funds -- whether it be the Middle Eastern, the Qataris, the Koreans, the Chinese -- for over seven or eight years, and it's taken a while.
NNAMDIJonathan, to what extent does the Qatari wealth fund participate in the day-to-day decisions being made at the construction site? What will it mean for Qatar to be a part owner once CityCenterDC opens?
O'CONNELLThey have a person here who is, I think, here full time right across the street where Hines has some offices. You know, I haven't seen any change in Hines' plans since the investment by Qatar. You know, the interesting sort of larger platform on which the Qataris are investing is Shariah-compliant investment because there are certain parts of the Quran and Islam that they would like to invest according to.
O'CONNELLSo when the first -- the announcement first came out, there were some, you know, real outcry about, well, oh, my gosh, this is like the Islamization of downtown Washington. In reality, I haven't seen any changes to their plans. You know, some investments that are more sort of strictly Shariah-compliant will say things about like, well, we don't want banks to be in there because collecting interest is sometimes viewed poorly, or we don't want to serve a certain amount of alcohol because that is sort of viewed poorly. But to the cities and the folks and the Hines folks that I talked to, you know, they discuss those things, but there wasn't really -- they're looking to have a fashion of -- really, a fashion district then there will be restaurants. And I don't think they have any restrictions on what they wanted to do.
NNAMDIBack to the phones. Here is Hassan in Falls Church, Va. Hassan, your turn.
HASSANGood morning, Kojo.
HASSANKojo, I have a question for your guests. If the investment from Qatar is politically motivated, one certain most of the money from the Middle East is naturally invested in United States. It is put in the banks in United States knowing those -- that those rulers, one day, will be ejected from those countries so that they have the money to live on. Can the -- your guests comment on this?
NNAMDIThe -- what would be -- you're saying, Hassan, that the political nature of this investment is to provide a future safe haven for a leader who is likely to be ousted from power?
HASSANExactly. You did it right.
NNAMDIAllow me to find out whether that was taken into consideration. Steve.
COLLINSI think that's -- that is not the case with the investment in CityCenter. You know, when you look at the sovereign wealth, whether it's Middle East or Norway or China or Korean, the sovereign wealth groups within these organizations, the real estate groups, are relatively small, six, seven, eight, 10 people. So they're charged with putting the money out. And it's -- again, it's probably two to 3 percent of total portfolio mix. So this is not the case of somebody trying to align their own pockets.
O'CONNELLI will say that there are certain investments that people from out of town will make and you can see that they had a little bit of sort of like a glory angle there, like they wanted to have a downtown building. And probably my favorite example is The St. Regis Hotel, which is just a bit north of the White House...
NNAMDIYeah, I was gonna ask you about that.
O'CONNELL...a very prominent historic hotel. And really, right during the boom years, we had an Irish investment group by The St. Regis at a bubble-era price and fly the green, orange and white flag out front. And very sadly, they, you know, they lost the building when the financial collapse happened, and they fell behind on debt payments.
NNAMDIThey paid too much money for it. The economy fell apart.
COLLINSAnd they burrowed too much money.
NNAMDIYeah. They started defaulting on the loan, that Irish company did, and eventually lost it. So not all foreign investments are necessarily a success. Hassan, thank you for your call. Here is Paula in Washington, D.C. Paula, you're on the air. Go ahead, please.
PAULAOh, thank you so much. I need to turn off this radio.
NNAMDIGood idea. Just talk to us on the phone.
PAULAThank you. First of all, I'm so happy that you're addressing this issue. And I am concerned that there is so much outside investment. I think it matters who owns property in our nation's capital. And I'm wondering if people are aware of it or if makes a difference. I appreciate what you've been saying. And just the fact that you're raising the question is so very important. I am concerned, though, and would like to see it diminish in some way. Is that possible? Thank you for your time.
NNAMDIAllow me to have Jonathan deal with your call because, Paula, transparency apparently is one of the advantages of -- for these foreign investors of owning property in Washington that won't be a secret.
O'CONNELLI mean, I think for the most part, it would be very difficult for one to tell walking past a office building downtown whether the owner lived -- anything about the owner really of where they lived. Although you do see interest in having local people own real estate in their neighborhoods. I know, Kojo, you had Fundrise, the founders of Fundrise...
O'CONNELL...on this program. And, you know, their sort of program is they want to encourage small investors, as small as $100, $1,000, to be able to buy stakes in kind of smaller...
NNAMDILike around H Street, Northeast.
O'CONNELLYeah, smaller storefronts in kind of developing neighborhoods. And people have really, really gotten excited by that. They wanna own a portion of, you know, the bar or the restaurant that's getting built in their neighborhood that they are going to spend their own money at. I personally think there are some questions about what actually control those local investors will end up having and what their stakes will be worth and whether those risks or the potential returns.
O'CONNELLBut there's no question that the Fundrise folks and other sort of similar platforms have gotten people interested in the idea of owning the commercial properties in your neighborhood.
NNAMDIPaula, thank you very much for your call. Steve, you wanted to add anything?
COLLINSWell, yeah. I also would like to say that -- and I would say in almost the majority of these cases, the foreign investor needs a local partner and operates within the local partner perimeters. If they don't, choosing an organization who has offices here and has been a long-time investor in the U.S., using, like, Jamestown as an example.
NNAMDIAll right. Thank you for your call, Paula. Got to take a short break. When we come back, we'll continue the conversation. You can still call us. Do you feel there are any downsize to this uptick in foreign investment in D.C. commercial real estate? Give us a call, 800-433-8850. Or you can send email to firstname.lastname@example.org. You can go to our website, kojo.org, ask a question or make a comment there. I'm Kojo Nnamdi.
NNAMDIWelcome back to our conversation on foreign investment in D.C. commercial real estate. We're talking with Stephen Collins, head of the International Capital Group for the Americas and the head of capital markets for the Mid-Atlantic at Jones Lang LaSalle, a real estate services firm. Also with us is Jonathan O'Connell. He covers development and commercial real estate for The Washington Post and Capital Business. We're inviting your phone calls at 800-433-8850.
NNAMDIDo you feel this new influx of foreign investment is making Washington into a truly world class city or not? 800-433-8850. Or send us a tweet, @kojoshow. Another long-foundering project that was saved by investment from aboard is the hotel at the New D.C. convention center. How did money from Abu Dhabi made construction possible, Jonathan?
O'CONNELLWell, if you remember, Kojo, the convention center hotel have been planned for as long as the convention center have been planned. And yet, the convention center opened without a hotel and really kind of strangled out convention business because there is no hotel next door. And I know that Greg O'Dell, the head of the convention center authority at the time, and he's still there -- was so desperate to get the hotel built that he proposed to the city that the city pay to build and actually own the hotel itself.
O'CONNELLAnd so, you know, which is a dramatic move, I mean, the city isn't usually in the hotel business or managing a hotel. So the compromise that was born from that is that the private developers of the hotel, using some city money, a fair amount of city money found, you know, another investor to come in and take -- I don't remember the percentage of the entire deal, but you might, Steve, but over 50 percent of the deal. And the money ended up being from Abu Dhabi.
COLLINSI don't know the percentage of the investment, but as, you know, Jones Lang LaSalle hotels is one of the largest sellers of -- brokers of Jones -- of hotels in the world. And I do know that, you know, while it seems like the big investor is the Middle East investor for hotels, it's not really the bigger institutions -- U.S. institutions that are investors in development. But the foreign -- Middle Eastern specially -- like large convention center hotels in urban areas. So that was a logically -- they were logical candidate.
NNAMDIWhy was there such a difficulty in getting that hotel? I mean, the convention center seems, in a way, to have been a real magnet given this is Washington, D.C.
O'CONNELLGood question. Part of it is a really large hotel. There's not that many people who would be interested in buying that big of a stake. Also, the time that they wanted to get it built. When they were actually ready and had the land ready and had all the zoning prepared, the economy at that point have fallen apart. So if they could've gotten maybe out the door before the economy collapsed, they might've been all right.
O'CONNELLInstead, they weren't quite ready to get it built, and then the economy fell apart, and all the people who already invest money and built things, you know, all of that had pretty much stagnated at that point. And so then you're looking at a further delay. And actually, that was the concern with CityCenter. I mean, CityCenter took forever to figure all the approvals and get the deal with the city approved and make sure that all the sort of neighbors had been made aware and had their chance to have input on the project.
O'CONNELLAnd then by the time that happened, right then the economy fell apart. So if not for, you know, one major huge lump of money from, in this case, another country, it might have taken a lot of time to convince, you know, a number of banks to find some debt on it and somebody else to own the rest of the property. We could still be waiting for CityCenter to start.
NNAMDIWhat do you think? Do you work in a building with a foreign owner? Give us a call, 800-433-8850. What do you think about the boom in foreign investment in D.C. real estate? You can also send an email to email@example.com. Last month, Korean investors bought Washington Harbor that's at the foot of Georgetown. It is a complex on the Potomac River that includes the Waterfront restaurants Sequoia and Tony & Joe's.
NNAMDIThe Korean investment of roughly $360 million reportedly makes it the region's largest commercial real estate transaction this year. How did that investment come about? Steve.
COLLINSWell, Korea had been -- various groups within Korea had been speaking with U.S. investment managers, and principal financial is the one who is advising the Koreans on that transaction. And so what happens with the new law within Korea, you have to have a financial institution between you and the investment sponsor. So we call them aggregators.
COLLINSAn aggregator called Simone connected with a principal and said, we can bring along our investor package with you, and we reached out to the pension funds within Korea, and they did. And at the end of the day, it's first to start with two or three investors into the opportunity. At the end of the day, I think it was six or seven different Korean pension funds teamed up with Simone and principal being the sponsor.
NNAMDIJonathan, anything to add to that?
O'CONNELLI just think -- I don't know that -- it took me a while before I even got into covering this to realize that a lot of the office buildings downtown are owned by insurance companies and pension funds. So, you know, if you look up the ownership of a downtown hospital, it may well be owned by the pension fund of California teachers or, you know, New York teachers or New York fire workers, whatever it is, firefighters, whatever it is.
O'CONNELLI think what we're seeing is an expansion of that dynamic worldwide now. I mean, we're talking about six or seven Korean pension funds. You know, it may be the retirement fund of the Korean -- I don't know, Korean teachers for all I know. And that's -- those institutions are historically the owners of these downtown buildings, and it's those institutions worldwide now that are doing the same thing.
NNAMDIWhat happened to the local institutions, the local money and the American pension funds that used to buy up these real estate deals here?
COLLINSThey're still buying, but they're buying some through different in direct investments, we say, and to funds, so they don't have to manage it themselves. With the exception of TIA, you see investors buying into like a fund like the Beacon property, Hines Global Fund. So they're investing still, but they're investing through sponsors.
O'CONNELLBut like a good example of that, though, Kojo, is the Carr Company. Oliver Carr started the Carr Company and developed probably a quarter half of downtown Washington. And his family was very well-known and is still very well known in this town for various civic philanthropy, et cetera. The Carrs recently took on them major investments from this Israeli company, so just about half of all of Carr properties now is owned by Israeli investors.
O'CONNELLAnd Carr and -- now, the Carr empire is probably going to grow again because they have this money now to go and invest again, find new development deals, find office buildings that they think they can improve in some way and make more valuable in some way. So in that case, we actually have one of our best known local families partnering with money from halfway across the globe.
COLLINSOn that transaction...
COLLINS...specifically, J.P. Morgan was the big financial partner for Carr. And they decided they wanna kind of limit some of their exposure into D.C. because they other exposures elsewhere. So they are the one that sold their percentage interest to the Israeli firm. And we're seeing a lot more Israeli money coming into the U.S. via different insurance companies.
NNAMDIThe massive redevelopment of the Southwest Waterfront, long planned project that's still shopping for foreign investors, the developer Monty Hoffman travelled to China last year with D.C.'s mayor Vincent Gray on a trip aimed to drumming up interest in D.C.'s projects. What's the story there?
O'CONNELLSo, you know, people who have known as the Southwest Waterfront know it, but it's -- it was developed in the 1960s. There are a number of restaurants -- the Waterfront market, the yacht club, et cetera. The city has been trying to redevelop the Waterfront for, I would say, about 10 years now. There is a development team in place. They've been working on it. They've been working on it five, six, seven years now probably. Monty Hoffman will be in the head of the development group.
O'CONNELLAnd now is the time where they have approvals from the city, they have some assistance from the city, and they need to go out and find the financial partners who are willing to invest in building the Southwest Waterfront again. And, you know, you've seen renderings of some of the office buildings, apartments, condos that they wanna have there. The graduate school have a campus there. There will be a four-star hotel there.
O'CONNELLThe question is, who is going to step up and finance it? And it may not be a foreign company or a foreign investor. It may be all, you know, local or American banks and investors. But you can sort of see the importance and the opportunity in finding money in other countries because Hoffman has been to China. He's been looking and talking to foreign investors about whether they would be interested in putting up the majority of the money just the same way that had happened in CityCenter.
NNAMDIOn that trip, it's my understanding Mayor Gray also pitched the Export-Import Bank of China on investing in the city's planned streetcar system.
O'CONNELLThat's right. You know, it's funny, when I talk with Mayor Gray after he got back from his trip to China and while he was out there, he and his deputy mayor Victor Hoskins, they laid out all these enormous development projects and infrastructure projects we have in D.C., the streetcar system, Walter Reed, St. Elizabeth, these big deals people are trying to search and find money. And, you know, before one of the investors, I think, the response Mayor Gray got was sort of, well, that's it?
O'CONNELLWe could do that in one -- let's do all of that in one deal sort of thing. So the amount of money that is sometimes available is colossal. The tricky thing a lot of times is who is going to control these things once the money comes through. With CityCenter, it wasn't such a big deal. But, for instance, if I'm Monty Hoffman and I've been putting my blood, sweat and tears and money into developing the Southwest Waterfront all this time, if an investor from another country said, I would love to develop the Southwest Waterfront. How about I just take out your stake and everything else, and you'll be on your way, and I'll do it.?
COLLINSThat's not gonna work.
O'CONNELLMaybe that's not the deal Monty Hoffman wants and maybe that's not the deal the city wants. So you have to -- as Steve said, you have to find a combination of a financial marriage but also a management marriage for the property.
COLLINSFrom the Chinese perspective, we're seeing quite a few Chinese developers who have made money within China, wanna get their money out. They're worried about if something happened into it, sort of getting the money out. They just made a major investment in Los Angeles, the downtown asset they bought from California state teachers. They are looking for large development projects. That's what their goal is. They're different than the Koreans who are looking for finished product. They're looking for large development projects.
COLLINSAnd Jonathan is right, the bigger the better for these guys. And so -- but the issue is they wanna control it. And I've said this in the past, they're -- I say they're practicing. They're making their offers on deals and then just seeing how the process goes. They like to negotiate off-market though.
O'CONNELLBut imagine that, though, I mean, the streetcar, we've been -- how long have we've been inching along on H Street? We have the tracks down, trying to figure out when to get the stations open...
O'CONNELL...trying to figure out the -- right? Imagine if there was enough money suddenly available to build the whole 22 miles that they have planned at the same time and how much quickly -- more quickly the whole thing get built. It's amazing to think about and rather than inching along the whole way. But what is given up if you try to go for that?
NNAMDIApparently what is given up is local participation in that deal.
COLLINSWell, the Chinese might wanna convert it to a high-speed train anyway, so.
NNAMDIExactly. Right. If you like to join this conversation, if you have questions about the deals that foreign investors are making in commercial real estate in the District of Columbia, give us a call at 800-433-8850. Do you see any downsize to that foreign investment, or do you see it as an indication that Washington is becoming a truly world class city? What are your concerns? 800-433-8850, or send us an email to firstname.lastname@example.org.
NNAMDIIn addition to development projects, foreign investors are buying heavily into the office building market here. What makes a Washington office building filled with longstanding tenants a good buy for foreign investors? Steve.
COLLINSI think Jonathan mentioned early on. If you're looking at making an investment into commodities or into cash, into savings bank, you're gonna get .2 percent on your savings where you can get it. In Washington, D.C., you can get a 4 1/2 to 5 1/2 percent yield on your return -- on your investment. It's -- looks great. Plus with the federal government being based here with the credit worthiness of most of the tenants because it's a government lobbying town, it looks like it's a great investment for these folks.
O'CONNELLYou know, one of the things that someone had pointed out to me about this is a lot of the countries that we've mentioned today have a lot of their wealth in oil or from oil. And say, you know, 95 percent of your country's wealth is from oil, that's probably not the level of diversification you want for your portfolio. You need to find something else to put that money in, in case the oil prices collapse.
O'CONNELLSo if you can put maybe, I don't know, another 5 percent in American real estate and you have still -- keep whatever larger portion in oil, it's a way of just balancing yourself in case something, you know, just like what you do with your own investments. You don't wanna invest everything in one type of product. I think that it just looks like a way for them to sort of diversify to me.
NNAMDIAnd it's a stable investment.
NNAMDIThe fact that these are buildings in which companies have been there for 15 or 20 years already suggest that this is an investment that it may not be the highest yield investment that you can make ,but it's going to provide an almost guaranteed return over a 20-year period.
COLLINSFor the risk adjusted return and for their credit officer or the risk adjusted officer within the banks and the investors, this looks like a good bid. You know, the flipside of this is you have -- the same question could be had in Europe when you, you know, five years ago, you had four or five investors looking from Europe -- U.S. into Europe. Now, you have 30 private equity firms trawling around Europe looking for opportunities.
O'CONNELLI also think it's particularly true now because remember when the economy collapsed in the U.S., right then is when the president and Congress started making these investments with stimulus to try to figure out how to pump some money into the economy and get jobs, people get hired back. Right when that was happening, all that money that was -- the Congress was spending, a lot was getting spent in Washington to figure out all these problems.
O'CONNELLSo a lot of those deals that happened right away at the -- as Washington came out of recession were in Washington and that's happened in past recessions also. And foreign investors see that Washington real estate comes back faster than the rest of America. And so now that we're coming out of -- we're in this recovery now. Washington, historically, looks better at this time period than other parts of the country does.
NNAMDIGot to take a short break. When we come back, we'll be continuing this conversation on Washington, D.C., becoming a magnet for foreign investment and commercial real estate. Taking your calls at 800-433-8850. I'm Kojo Nnamdi.
NNAMDIWelcome back to our conversation on foreign investment in commercial D.C. real estate. We're talking with Jonathan O'Connell, who covers development and commercial real estate for The Washington Post in Capital Business, and Stephen Collins, head of the International Capital Group for the Americas and head of Capital Markets for the Mid-Atlantic at Jones Lang LaSalle, which is a real estate services firm.
NNAMDIWe got an email from Olivia, who says, "I used to live in Qatar and found the city of Doha to be excessively decadent. I have never seen an entire skyscraper with a for rent sign until I saw one in Doha, and the city appeared to be built without any city planning. Is there any chance that these foreign investors will have an impact on Washington, D.C.'s cityscape?" Well, for one, we have a height limit here. So the skyscraper is not likely to happen but in any other way, Jonathan?
O'CONNELLI mean, the ones that -- the big ticket projects that I see, you know, being big enough for foreign investors to take a look at really are all planted zone by the time they're being offered to the market. By the time Steve gets involved in trying to figure out who the investors were gonna be, you know, we've been going through the zoning and approvals for Southwest Waterfront and city center for well over five years, and you could argue 10 years in some cases.
O'CONNELLI think -- I feel like on those projects, the people of D.C. have had their say. They've told the developers and the city officials what they would like to see. And now, it's a matter of getting it done. So I, you know, I don't probably see an unplanned skyscraper happening in Washington anytime but it does, I guess, point to the fact that there is sometimes a different speed at which the foreign investor would like to travel and the local developer knows that he or she can travel.
NNAMDIAny impact on architectural style?
COLLINSYou know, there's a reason why that -- probably that building had a for lease or for sale sign because it probably was designed improperly. The tenants here in the United States, they all are requesting lead certification. They're all requesting green buildings. Their real estate groups within the -- whether it's a major law firm, they have a major real estate practice with a huge law firm who designates where they can and cannot go based upon the design of the building. So that dictates what the developers will build is what they'll lease.
NNAMDIWe talked about Qatar. We talked about Israel. We talked about Abu Dhabi. What are some of the other countries who are actively shopping for office buildings here in D.C.?
COLLINSWell, you will have start -- soon start to have the Australians back in the market. They were in the market and took their medicine and got out, but you'll see them back again in the form of some of the superannuation funds. You don't -- you'll see a few French firms but you'll see the Germans are gonna be back with a vengeance. They have new legislation that allows them to invest in a different vehicle. So you're seeing, one point in time, you have, you know, six or seven Germans active here. Now, there's three, but I think soon within the next 12 months, you'll see about six or seven back again.
COLLINSNorway has come as an -- comes in the form of the Norge, which is the sovereign wealth fund of Norway, and they always team up with somebody which is typical. So they'll come in through a TIAA-CREF or another partner that they will identify.
O'CONNELLThere's an interesting French deal that we're watching though, Kojo, which is the Watergate Hotel. You may recall the Watergate Hotel...
NNAMDIThey've been having some problems over the past few years.
O'CONNELLThat's right. The Watergate Hotel sits vacant despite its location, you know, amongst the high-end condos and right on the Potomac River there. It was sold -- it was traded hands a number of times. First, during the peak years of the -- kind of the boom of real estate and then ran into foreclosure proceedings and Euro Capital Partners from France picked it up, I believe, at auction once the foreclosure proceedings had started and have yet -- and this is a number of years ago now, have yet to announce what kind of hotel they're planning to build, what the hotel will look like or begun any work on actually improving the hotel.
O'CONNELLAnd so, you know, I'm looking forward to seeing what that ends up looking like, but it's another situation where you sort of wonder at this point if they knew exactly what they were getting into when they bought it.
NNAMDIAnother iconic property in Washington, D.C., but its iconic nature goes back now four decades. So people wonder whether that might, in fact, be failing. What are the downsides of foreign investors playing such a big role in these highly visible landmark projects in Washington? Are there cultural differences or disagreements that may come into play.
COLLINSOh, it's a -- the majority of the investors who are dealing with -- who are from the foreign institutions have been either U.S. educated or UK educated. So they know the policies, they know the customs within the U.S. And again, most of them have made other investments here in the U.S., so they know how the game is played. And it's rare that you're gonna find somebody that really doesn't know how the whole game is played. Maybe you might see that from China, which is why they haven't been that successful to date.
O'CONNELLAnd, I mean, it makes sense that if you're from another country, you'd want someone local on the ground to help you make an investment. I mean, imagine if you are trying to invest in another country where you didn't live, you'd probably want somebody who is there all the time, following every single change in the real estate market there to work on your behalf.
O'CONNELLThat's the same thing. You see the Carrs, the Carrs have known every inch of downtown for, you know, as long as this generation, as long that they've been adult, certainly, and that really now have partners who know everything about downtown Washington.
COLLINSThe other issue, I think, with respect to the international players is if you don't have an office here, we sell office buildings and investment properties here in the states differently than we do in Europe. It's completely different process. So it's hard for a foreign entity who doesn't have a sponsor or an office here to play in the game.
NNAMDIYou know, one of the reasons we decided to have this conversation was because we were wondering whether there was any widespread unease. You mentioned Fundrise helping people buy shares of local properties, but that does not seem to be widespread unease about the growth in foreign investment in real estate here.
O'CONNELLI will say that any time I write about foreign investment and Washington real estate, I get phone calls, emails, comments on our website saying that -- from people who are concerned. But pragmatically, it's hard for me to see what this sort -- the real scare is. I mean, picture even the Fundrise, for instance. Let's say the investors in the Fundrise property on H Street, you know, they developed their property, it becomes successful, and they want to cash out and make a return on their investment.
O'CONNELLThey will put their portion of ownership of 906 H Street or whatever property it is up for sale. Say, the person who offers the most money is not from America, are they then not going to sell to that buyer because they're not American and go down to number two and say, OK, you're up to the next most, where are you from? It doesn't make sense as a business to do that. And I don't think that when you get into like the actual transactions and how the logic behind them that people are really concerned about it.
NNAMDISteve, let's see how you dance around this one. We got an email from Jonathan, who says, "How do foreign investors differ from local investors? Frankly, anyone but Trump is fine with me."
COLLINSI'm sorry. Anyone?
NNAMDIBut Trump is fine with me according to this email.
COLLINSYou know, they really don't, you know, they really don't differ a lot. They -- maybe the time that takes from start to finish to get a deal completed might be a little longer. And it might have to dig or dig deep into the details, but it's -- they're really no different than any other investor.
NNAMDIHow about the ABT part of the question, anyone but Trump? But we'll...
O'CONNELLYou know, that Trump is interesting as anyone because as, you know, many listeners know, Donald Trump and his family are planning to redevelop the Old Post Office's Pavilion on Pennsylvania Avenue into a luxury Trump hotel. They won the process in very competitive sort of bidding through the federal government to lease the property and planning to redevelop it. But now, will Trump do the whole thing with all of his own money, as he says he could, or will he bring on other investors?
O'CONNELLI'm sure if there are other investors with -- willing to invest a certain amount of money at a certain cost to the Trumps that that would be interesting to them. Will those investors only be for America, or could they be from abroad? I have no idea, but it's the kind of big deal that would attract interest from outside of America. So I'm sure there are conversations that could be had there.
NNAMDIStephen Collins, in the long run, what does this influx of foreign investment, in your view, mean for the District?
COLLINSI think it's great. It means that -- it shows that we are a world-class city and a livable city for investors to come and invest in residential and office. I think that, you know, the issue of -- I guess, one of the issues at hand is what's gonna happen with FIRPTA and how that's gonna affect their investment. But that aside, they still continue to invest in the U.S.
COLLINSIt's not like they need any more of a reason to do it. I think it's gonna be great for the city, it's gonna be great for the residents, it's gonna be great for the other investors within the city.
NNAMDIAnd then there is city jealously. We got this tweet from Terrence, "I wish Baltimore is getting some of this investment in transportation infrastructure in particular. Baltimore does not fall within what's commonly known as the DMV."
O'CONNELLNo. I mean, it's funny, we talked about Baltimore. Even in this situation, outside of the core of downtown Washington is often not even in this conversation. I mean, Steve was talking about the Norwegians needed to make investments of at least $500 million, which should be worth their time. $500 million can buy you a lot of real estate in Washington.
O'CONNELLI mean -- so once you get outside really the central business district, unless you're talking about an enormous development project like, you know, Southwest Waterfront, which is $1.5 billion, you're not -- you're really not talking about things, for the most part, in Silver Spring or Arlington even. I mean, maybe you get out to Tysons and get some huge portfolio deal. But for the most part, it's downtown New York, downtown Washington, downtown Boston, the downtown core central office business districts.
NNAMDIWhy do you think that that emphasis on the downtown? There seems to be a return of the downtown.
O'CONNELLWell, I mean, part of it is that those were the big -- most valuable properties are. And if you want -- if you have a lot of money you're looking to spend in one fell swoop, rather than pecking around and doing little deals, that's just kind of a natural place. But also, that is where the Washington region, some of Washington region's most stable, just like low-risk office buildings are also.
COLLINSWe've seen this happened around the U.S. We call it the reurbanization of the cities: Amazon moving back into Seattle, a lot of the service areas, companies moving back into Chicago, Google moving back into New York. It's they can hire young, smart, aggressive people to go work for them if they're in the suburbs. They got to be downtown. That's where everybody wants to live.
NNAMDISome investors, Steve, want what you refer to as wealth preservation. They buy iconic buildings in London or solid performers in the U.S. and planned to hold on to them, well, forever. Who's doing that kind of investing and where?
COLLINSThe majority of those investors are high ultra -- we call them ultra high net worth investors coming out of Asia Pacific, who are -- have made incredible wealth in the commodity business, palm oil, et cetera. And so they need to put their money, they can't buy anymore buildings in Singapore, Hong Kong, so where is the next best place? They haven't jumped to the U.S. yet 'cause they can't get comfortable with it yet, so they go to London where they're very familiar. So they buy these buildings in London.
COLLINSThat will be an issue for some of the London investors over the next 15, 20 years if they don't let these -- some of these assets go. Again, they're not big assets, but they're iconic.
O'CONNELLI actually think wealthy individuals, particularly from, you know, around America and the world could play a role in things like the condos at CityCenter. So all the really high-end condos at CityCenter. If you're somebody who globe-trots, flying around the world quite a lot, if you want a landing spot in Washington and you have unlimited money, that might be the place where you buy your kind of place to hang out when you're in Washington, a place to sleep when you're in Washington.
O'CONNELLNow, what if a lot of the CityCenter condos end up being purchased by people who don't really live in the CityCenter? Is there something loss if a lot of that building is owned by people who are out of town and not usually there? I don't know, but it's something I think that might -- this is the first -- I feel like this is a tow in the water for Washington, and that this is clearly the premier downtown place to live, and it's a big place to live. I think you could see people from all over the world buying condos there, you know, just as the place to sort of stay.
NNAMDIA lot of places in New York like that, where people just skate because, well, it's New York. Can you explain the interaction among the different parties in a big construction project like CityCenterDC? The developer post together the land, gets the necessary city approvals and then has to find the financing to actually build the project.
O'CONNELLSure. Well, that one's a little bit distinct in that D.C. own land. The city government owned the land because the convention center used to be there. And quite a while ago, the city government -- I think this is probably under Mayor Tony Williams, who said, we would like this redeveloped. And we will -- we are gonna search for a private partner to help us to do it. And the team that was selected, the developer team was Hines and along with a partner Archstone.
O'CONNELLAnd they then -- Hines and Archstone started planning what they thought should go there. And eventually that plan has to be approved by, A, the zoning commission, of course, but, B, the City Council because the City Council put up, you know, is putting up a ton of a land in this deal. The government is contributing this really valuable piece of land downtown, one of the most valuable developments since the East Coast.
O'CONNELLAnd so you can look back and see that there was a City Council vote to determine whether that was a good idea or not. And there is a deal between the District and that developer, whereby once this project is done, the developer will be paying the city a lease rate every single year on the land, but also that the city will be good to tax the property. So I expect if one CityCenter is done, it will have a noticeable effect on the city's tax revenue every year. I mean, it is such a big valuable downtown property. You will notice it, I think.
NNAMDIAlmost out of time. Looking ahead, what are some of the projects in the works that might be right foreign investors? Just to name one example, Steve, the D.C. streetcar project.
COLLINSI don't -- from our standpoint, what the assets type we get involved in, that would not be something we would do, but I can see the Chinese investors invest into something just like that.
NNAMDIAnd afraid that's all the time we have. Stephen Collins is head of the International Capital Group for the Americas and head of capital markets for the Mid-Atlantic at Jones Lang LaSalle, a real estate service firm. Steve, thank you for joining us.
NNAMDIJonathan O'Connell covers development and commercial real estate for The Washington Post and Capital Business. Jonathan, drop by more regularly, will you?
O'CONNELLI'd love to, Kojo.
NNAMDIThank you for joining us. And thank you all for listening. I'm Kojo Nnamdi.
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