Pacific Rim investment in Southern California.

The times, they are a-changing!

In the 1980's there was an almost hysterical view that U.S. real estate was being overrun by foreigners intent on dominating our lives through the process of buying all our real estate. This was particularly true in Southern California, which was the beneficiary of large amounts of both Pacific Rim and European real estate investment dollars. Many of us clearly recall the Los Angeles Times, for example, publishing aerial photographs of the downtown Los Angeles skyline complete with little flags indicating that over 50% of all signature office structures were owned or controlled by foreign investors. In fact, even today, the Japanese own 30% of all the highrise "trophy" office projects in downtown Los Angeles.

The peak period for foreign investment in U.S. real estate was 1990, when more than $34 billion in property was purchased. Japanese investment actually peaked in 1988, when over $16.5 billion was invested in our markets. In 1991, that number had dropped to about $5 billion and 1992 will show an even steeper decline.

Because of the international economic uncertainties which underlie this changing real estate investment picture, foreign investment in the U.S. in 1993-94, will most likely be concentrated in the areas of residential real estate, where risks are fewer and returns faster compared with the commercial sector. Pacific Rim investors will continue to focus on California, Hawaii, New York, Florida and the state of Washington, as the more attractive investment locations.

On the industrial park side, development will be tied to the influx of manufacturing and distribution activity from the Pacific Rim, while commercial office development will continue to slow with restructuring and workouts dominating most activities. Therefore, if foreign investors, specifically the Japanese, are interested in buying U.S. real estate assets, they will limit their focus selectively on highrise residential properties and high profile golf course or recreational property. Driven by traditional "Japanese" attitudes, rather than by merely an obsession with golf, the Sumitomo group recently bailed out the Cosmo group, former owners of Pebble Beach, by refinancing the Monterey resort area to the tune of $500 million.

In the 1980s, Japan became the "Arabs" of the world. Just as OPEC deluged the world in petrodollars during the 1970s, so in the '80s did Japan barrage it with wads of outwardly mobile yen. Today, seven of the world's 10 largest multi-national banks are headquartered in Tokyo, while fully a quarter of all U.S. Treasury bonds are in Japanese hands. And all across the world, from Sydney to Singapore, Tijuana to Dusseldorf, Japanese joint ventures are springing up in almost every field.

While the 1980's wave of real estate investments continued apace, concerns were being expressed in Japan. These concerns focused to some degree on the high level of attention being paid in the U.S. to Japanese investment here. As a culture, Japan resists exceptional public attention to its business transactions, and the public spotlight being focused on its U.S. investment activities seems far beyond the call. After all, Japan was only one of many foreign countries which have acquired and continue to hold real estate investments in this country. Additionally, many American companies have made significant profits selling real estate assets to Japanese investors. Finally, the realization was dawning in Japan, that the U.S. recession was having an adverse impact on the value of real estate and that future negotiations needed to be based on realistic pricing and fair market evaluation.

What About Today?

Today, we could categorize the Japanese attitude towards U.S. real estate investment as one of caution due to political and financial considerations. To understand the near term, we need to be aware of what Japan is facing domestically.

First, many of the "go-go" companies of the '80s are suffering enormous liquidity problems and have either filed for or are teetering towards bankruptcy. A few examples include: Itoman, Dai-Ichi, Shuwa and Maruko. Additionally, the banking industry has been criticized for its overzealous lending practices. This has led the Bank of Japan to tighten monetary policy in reflection of its view that long-term monetary easing was a major factor contributing to skyrocketing land prices.

The total of loans made by Japanese banks to the real estate industry from 1985 through 1988 increased annually by increments of 20-30%. Since then, the rate of increase has slowed, and at the end of September 1990 had decreased to 6.9% over the previous year. This process has been hastened by the Japanese Ministry of Finance (MOF) which has requested that financial institutions exercise self-control in their real estate lending practices and has strengthened its "window guidance" (i.e., government influence).

The financial performance of the Japanese real estate industry has deteriorated gradually because of the effects of this tight monetary policy, in terms of both interest rates and funds available. According to the Short Term Financial Survey by the Bank of Japan, business performance has been deteriorating since the beginning of 1990 and is forecast to continue to decline through mid-1993.

Nonetheless, Japanese investors will continue to have an active interest in Southern California while maintaining a cautious attitude towards realistic pricing and a focus on more effective management and operational issues. As the Japanese population continues to age, retirement issues become higher priority.

Southern California provides a familiar and comfortable environment for retirement and is the airline destination of choice for vacations and recreation. Additionally, with the wealth of individual family groups in Japan, cross-border estate planning facilitated by real estate purchases could create interesting opportunities.