German institutional investors have significantly adjusted their focus amid a tide of rising interest rates since emerging as one of the largest global buyers of core US commercial real estate assets after the global financial crisis.
According to reports, the German financial institution invested $1.2 billion in US real estate in the six quarters ending in the fourth quarter of 2023, up from $8 billion invested in the previous six quarters, when borrowing costs were almost 0%. %Diminished. Alex Foshay, vice chairman and head of international capital markets at Newmark (NMRK), said:
“The dramatic decline in German investment was driven not only by the Fed's interest rate hike, but also by individual investor redemptions in Germany's open-end funds, concerns about conserving capital for upcoming refinancings, and concerns about the dollar It was also caused by an increase in hedging costs between the “euro,'' Foshay said.
The most important share pool for CRE investments from Germany to the US comes from open-end funds, the largest being Deka Imbilien, Commerz Real and Union Invest. Forshay said these funds are wary of redemption concerns as they choose to reduce their exposure to U.S. real estate as the Federal Reserve begins aggressive interest rate hikes in March 2022. It pointed out.
“There are reasons why many large companies have been very passive over the past 18 months, not least because of general market conditions and not wanting to catch a falling knife,” Forshay said. These include,” he said. “There has been a significant pullback, but some deals have been closed and demand remains.”
Large German funds have recently focused on diversifying their US CRE holdings, including Deka, which has recently focused heavily on US logistics and life sciences facilities with plans to reduce its office exposure. Also included.
Foshay said 30% of the money German investors put into U.S. commercial real estate in 2023 went to the office sector, down from 78% from 2020 to 2022. Meanwhile, the share of multifamily housing increased from just 6% in 2020-2022 to 43% in 2023.
Signs of Germany's retreat are also evident in CRE bond investing. Aryal Bank sold approximately $65 million in bad loans at the Caxton Building office property at 229 West 28th Street in Manhattan in late January, four months after Newmark began marketing the sale. It was sold to the lender, Lexin Capital, at a deep discount. Areal sought to repay the loan after experiencing a maturity default in December 2022 amid leasing struggles due to hybrid working trends.
The German lender began looking for a buyer for the Caxton Building loan in September, while also looking to dispose of bad loans related to L&L Holding's Metropolitan Tower and RXR's 61 Broadway, also in Manhattan. .
Not only that, Areal also sold a $110.6 million distressed senior loan at 462 Broadway from Meringoff Properties in early January, with Newmark marketing the note sale.
Areal declined to comment for this article.
Charles Balch, head of real estate finance for the US and UK at Deutsche Pfandbrief Bank, said selling bad loans is always an option, but stressed that the practice is far less common in Europe.
“That's certainly something we're considering, because there comes a point for every bank where they look at their individual assets, look at their view of the market and look at who their sponsors are,” Balch said. “The bias against returning keys is higher in Europe than in the US because the US is a much more transactional market.”
Deutsche Pfandbriefebank is very active in opening deals in New York in 2022, including Meadow Partners' $288.2 million eight-story West Village office building at 95 Morton Street. It also included providing a $155 million acquisition loan for the purchase of . The bank also refinanced the Aurora Capital Associates retail building at 809 Washington Street in the Meatpacking District with a $123.4 million loan.
In a November investor presentation, Deutsche Pfandbriefbank noted that the asset value of non-performing loans in its U.S. portfolio fell by an average of 41% in 2023, while performing loans fell by 24%. As of September 2023, 80% of the German financier's US portfolio is concentrated in the office sector, with 63% concentrated in New York, 12% in Chicago, 8% in Washington DC, and 5% in San Francisco. There is.
According to a presentation by Deutsche Pfandbriefe Bank, when it was founded, all U.S. office properties financed by the bank were considered Class A properties, but now 5% to 10% are considered Class B properties.
At the time, the bank said: “Structural changes have led to some rapid and precipitous declines in the value of once-prime areas, but this is due to rapid and sharp declines in the value of some once prime locations in the United States as interest rates rise more rapidly and significantly than in Europe. Shorter refinancing cycles are also having an impact.”
According to financial firm MSCI, German CRE investment in the US fell by 89% from the second quarter of 2022 to the fourth quarter of 2023. From late 2021 to late 2023, quarterly capital inflows from German CRE to the U.S. fell by 97%, according to MSCI data.
The same data showed that the top U.S. market has experienced wide-ranging changes over the past two years with German capital flows. In the New York and San Francisco metropolitan areas, German CRE investment fell by 99% and 97%, respectively. Meanwhile, his CRE capital investments in Germany, Atlanta and Austin, Texas, in the same two years he grew by high triple digits.
MSCI Chief Economist Jim Costello said the German fund's decision to invest in the U.S. was driven by headwinds from rising interest rates and new challenges facing central business district office real estate due to the increasing trend of hybrid working. He said that
“We've done all the calculations there, and the expected internal rate of return is not sufficient to deliver the return we need,” Costello said. “If an asset is offered at a price too high to achieve the return I want, I'm willing to settle for a lower price unless other parts of the equation change. Offices these days, especially CBD offices. We found that there was a huge gap between buyer and seller expectations.”
Large German institutional investors have been actively moving into US CRE investments since the mid-2010s, starting with Union Invest's 101 Seaport, a 440,000-square-foot office building in Boston's Seaport district in 2016.・This was highlighted by the purchase of Boulevard from Skanska USA for $452 million.
The turmoil seemed to end just before the Federal Reserve began its 16th straight month of interest rate hikes. That's when Deka acquired Google-occupied office property in Seattle called Lakefront Blocks for $802 million in a deal brokered by Newmark.
“Although German financial institutions have significantly withdrawn from US investments since early 2022, their long-term desire to invest in the US and increase their overall allocation to this market remains strong.” Foshay said. “German open-end funds in particular now form a consistently significant share of the core U.S. real estate investor mix. As markets stabilize and investment volumes increase, German funds may return. and will return to the broader real estate sector.”
Andrew Cohen can be reached at [email protected].
