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March 18, 2016

Year of the foreign buyer: International investment more than doubled in 2015 and it's not done yet

Puget Sound Business Journal

Marc Stiles

Martin Bruhl did his homework.

The head of international investment management for Germany's Union Investment Real Estate was a driving force behind the company's $299 million purchase of two Amazon-occupied buildings in Seattle's South Lake Union neighborhood last December.
Bruhl said the company bought the 1-year-old buildings - one is five stories and the other six - because Seattle is one of the nation's fastest-growing cities and is attractive to young, well-educated people.

Seattle's commercial real estate industry will remember 2015 as the year of the international buyer. And it's no flash in the pan. Expect foreign investment to continue.

International investors purchased $2.8 billion worth of assets in the region last year, according to Real Capital Analytics, which tracks real estate investing. That tally was a staggering 214 percent higher than the year before. In the tri-county area, 96 percent of the investments were made in King County.

This type of foreign investment is important because it brings outside money to the Seattle area, promotes the region's global identity and brings more access to overseas markets.

The Chinese influence

Investors from China orchestrated the region's biggest deal of the year. Hong Kong-based Gaw Capital Partners bought the Northwest's tallest building, the 76-story Columbia Center in Seattle, for $711 million. All told, real estate investors from China and Hong Kong led the way with nearly $1.1 billion worth of commercial real estate acquisitions in 2015.

Singaporean investors were the second most active buyers, followed by those from Norway, Canada and Germany.

"I don't see it slowing down at all," said Holly Yang, a broker with West Coast commercial real estate company Kidder Mathews and leader of the company's Seattle-area China Services division. She said the group had a record year, and is getting more inquiries now. That led Kidder to hire another full-time China Services broker.

Earlier this year, the Association of Foreign Investors in Real Estate ranked Seattle the No. 5 U.S. city for foreign commercial real estate investment, up from No. 8 in 2015. The Washington, D.C.-headquartered group's rankings are based on a survey of its nearly 200 members from 21 countries. With an estimated $2 trillion or more in assets under management, members are among the world's largest international institutional real estate investors.

Seattle was tied with Boston for fifth place on the list. New York was No. 1, followed by Los Angeles, San Francisco and Washington, D.C.

Expected to further fuel the pace of investment is the Industrial and Commercial Bank of China. The state-run bank, which is the world's largest by assets, recently opened a business center in Seattle - its first in the Northwest. The business center was announced last fall during China President Xi Jin Ping's first state visit to the United States, which included a stop in Seattle.

Assistant CEO Jiande Kang recently told a group hosted by the Economic Development Council of Seattle and King County that it plans to expand into a branch office this year, with the eventual goal of becoming the bank's Pacific Northwest headquarters.

Yang said this will make it easier for Chinese investors to get financing for acquisitions.

Last year, when China's stock market tumbled and the Chinese government devalued the renminbi, there was concern that the flow of capital to the United States might slow. But if anything, it's increasing the pace of real estate sales, Yang said.

Pat Callahan agrees. He is president and CEO of Urban Renaissance Group, a Seattle-based real estate investment and development company, which is working with Asian investors. Gaw Capital Partners hired URG to manage Columbia Center.

As China's economy slows, Chinese investors are looking to park their money elsewhere. Hot cities across the U.S., including Seattle, will remain at the top of their list.

"There's no way (Chinese) demand for assets is going to diminish because Seattle is in that top tier now," Callahan said.

Not just China

Those developments, coupled with high-profile events such as Xi's official visit in September, make it seem like this is only a China story. It is not.

Last year, German, British, Norwegian, Singaporean, Japanese and Canadian companies snapped up apartment buildings, hotels, shopping centers, development sites and warehouses - especially warehouses.

Nearly $1.15 billion worth of Puget Sound industrial properties sold to foreign companies. That's almost half of the $2.4 billion worth of the total sales to domestic and international buyers, and only slightly lower than the almost $1.3 billion worth of office assets that international investors bought last year.

Norwegian and Singaporean companies led the way, buying a total of more than $872.4 million in industrial assets. Chinese buyers were next, snapping up nearly $152.8 million worth of warehouses.

Brett Hartzell, a CBRE broker whose specialty is industrial investment sales, expects that the sale of warehouses to foreign buyers this year could eclipse 2015 levels.

While that's good news for the economy in general, it's bad news for domestic investors, who face increasing competition for real estate assets in Seattle.

Concerted effort

Some of the international buyers are planning massive developments that will feed the foreign capital phenomenon. In downtown Bellevue, Plus Investment USA of China hopes to break ground this year on the first phase of Bellevue International Plaza just west of Neiman Marcus.

Ultimately it will have four 40-story towers, with one high-rise of condos because Plus Chairman George Liu envisions strong demand, especially among first-generation foreign buyers.

This wave of foreign capital is what the leaders of the Economic Development Council of Seattle and King County were hoping to see when they launched a strategic plan at the start of 2015. The goal is to attract foreign direct investment not just in real estate but into the overall economy.

That twice as much foreign capital was invested in 2015 compared to the previous year in the region's commercial real estate market is a very good sign, said EDC President and CEO Suzanne Dale Estey.

"I won't say the economic development ecosystem can claim credit for the magnitude of the increase, but there certainly has been a more coordinated, intentional effort in this region," she said. "It's exciting to see it bearing fruit."

International investors are drawn to Seattle by the same things as their domestic competitors - the blazing high-tech sector, a diverse group of major industries and a limited supply of land.

In their annual Emerging Trends in Real Estate report, the Urban Land Institute and PwC wrote that the 2016 outlook "could not be much stronger in Seattle."

This comes as Seattle - spurred in large part by Amazon and other tech companies' spectacular growth - has become a global first-tier city.

"When you go around the United States, and around the world, Seattle is a primary city. It comes up in the same conversation as New York, as San Francisco, as L.A.," said Bashar Wali, president of Provenance Hotels, which operates properties in Seattle and Tacoma. "This (economic) cycle has put us on the map."

For the full story, go to Puget Sound Business Journal.

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