- The Washington Times - Tuesday, July 29, 2008

Armed with oil profits, two Middle Eastern buyers recently snapped up New York’s Chrysler Building and General Motors Building for an estimated $3.7 billion. But their acquisitions of the two trophy offices belie their waning interest in U.S. commercial real estate this year as the U.S. economy stumbles and property prices dip.

Earlier this month, the Abu Dhabi Investment Council, one of the world’s largest sovereign wealth funds, bought a 75 percent stake in the Chrysler Building for an estimated $900 million. In June, Meraas Capital LLC of Dubai was part of a joint venture that bought the General Motors Building for about $2.8 billion.

But Middle East investment is expected to be flat or down this year compared with a banner year in 2007. More than halfway through the year, Mideast investors have shelled out $2.7 billion for U.S. assets, according to Real Estate Analytics Inc., a New York-based real-estate research firm. But at that pace, this year’s total sales will likely fall far below last year’s $8.2 billion in deals.

Other countries have pulled back their investment in U.S. real estate, and the disruption in the credit markets has halted many deals. At midyear, sales of office buildings were just a third of last year’s total through the first half. Retail-property sales were down 62 percent; industrial sales, down by half; and apartment sales, down by 45 percent.

Prices, especially in suburban markets, have started to slip, making many investors jittery about getting into a sliding market. And the economy, on uncertain footing, could hurt property occupancy rates and rents as tenants give back space or scrap expansion plans.

But the current investment conditions have pluses for cash-rich Mideast investors who have been able to grab landmark buildings, which are more likely to hold their value even in a lackluster market.

“They’re using this environment to win deals that they might not have won last year,” said Dan Fasulo, managing director of Real Capital Analytics. He pointed out that the Chrysler Building would have gone to an investor armed with easy financing if the deal had occurred the same time last year.

These investors are zeroing in on New York City, which accounted for nearly a quarter of all office sales in the first half of the year.

New York ranked as the top spot worldwide for foreign commercial real estate dollars, according to a survey conducted in the fourth quarter of last year, up from No. 2 the year before. The survey was released in January by the Association of Foreign Investors in Real Estate (AFIRE).

So far this year, property prices have more than held up in Manhattan. The average price per square foot for a Manhattan office is $877, up 24 percent from $705 a year ago, according to Real Estate Analytics.

“There’s a notion it’s a safe haven, that markets like New York City are ultimately going to retain their value,” said Joseph Gulant, a partner at law firm Blank Rome LLP, which helps negotiate commercial real estate transactions.

Mr. Gulant expects property values in more popular cities like Chicago, Houston and San Francisco to weather the commercial real estate slowdown better than others and will continue to draw foreign interest.

U.S. real estate has competed heavily for foreign money with properties in emerging markets like China, Russia and India. But foreign investors overwhelmingly believe the U.S. offers the most stable and secure real estate investments, according to AFIRE.

However, investing in the U.S. can get dicey for Middle East investors.

“There’s some reaction in the Arab investment community to some of the difficulties of doing business here,” especially following the political backlash over a U.S. ports deal two years ago, said Scott Arnold, the head of the real estate law group at King & Spalding LLP.

In 2006, lawmakers effectively derailed a deal by an Emirate company to manage six of the largest U.S. ports, saying the Bush administration and the agency that reviews security issues had not fully considered all the security concerns that had been raised.

And some members of Congress have raised concerns over the intentions of sovereign wealth funds in making investments in the U.S. Aside from real estate, sovereign funds from China, Singapore and the Middle East have invested more than $40 billion in Citigroup Inc., Merrill Lynch & Co. Inc. and Swiss bank UBS (which has a large U.S. presence) since late last year.

“The commercial community in the Gulf states is relatively close. They talk, and there are apocryphal stories of entering our country,” Mr. Arnold said. However, he expects a significant uptick in activity from Mideast investors next year.

“There’s still a strong view America is the largest economy in the world and best investment,” he said. “You always have to have a position in this market.”

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