Foreign investors like office market

Aided by a weak dollar and a desire to diversify their portfolios, foreign investors are looking at -- and sometimes buying -- commercial properties in the Twin Cities.

Last week's fall of the dollar to a record low against the euro and continuing declines against other foreign currencies is boosting the purchasing power of overseas investors. "In effect, it's put U.S. properties on sale," said Scott Pollock, a vice president of Bloomington-based NorthMarq Investment Services.

But there's a flip side to the dollar's fall for U.S. investors. A survey by St. Louis-based Bryan Cave, one of the country's largest international law firms, found a slight decline among U.S. real estate professionals in buying commercial property overseas in the next 12 months.

Foreign investors also aren't hamstrung by higher borrowing costs and stricter lending requirements that have made it more difficult for some U.S. investors to buy property.

"[Foreign investors] are coming in with all-cash offers or offers with lower levels of debt," said Steve Buss, a senior vice president of the Twin Cities office of CB Richard Ellis.

Foreign buyers paid about $291.5 million for office buildings in the Twin Cities last year, according to Real Capital Analytics, a New York-based real estate research firm. That's about 21 percent of the value of office deals done locally, comparable to Manhattan, where foreign investors accounted for 22 percent of the value of office deals. In Chicago, foreign buyers accounted for 4 percent of the value of office transactions last year, Real Capital said.

Here and nationwide, downtown office properties with long-term tenants are attracting most of the interest from foreign investors. Office buildings accounted for more than half the value spent by foreign investors in the United States and almost 90 percent invested in Twin Cities commercial property in 2007, Real Capital said.

The appeal of office buildings is based in part on the opportunity they offer foreign investors to allocate large chunks of capital. A single office property can carry a price tag of $100 million or more. The two largest office purchases in the Twin Cities last year went to foreign investors: London-based Strategic Real Estate Advisers acquired Fifth Street Towers for $187.6 million, while KanAm Grund of Frankfurt, Germany, bought the Ameriprise Operations Center for about $95 million.

Both properties typify the kind of investments that are attractive to foreign buyers, according to Buss. Both had solid, credit-worthy tenants, with Ameriprise the sole tenant at the operations center and Wells Fargo a major tenant at Fifth Street Towers.

While Fifth Street Towers was 18 percent vacant at the time of its sale, the two-building complex had recently undergone a renovation. "That gave the new owner the opportunity to lease up at higher rates, benefitting from the renovation and the fact that there are no new office buildings under construction to compete [for tenants]," Buss said.

Although it's not downtown, the presence of Cargill Inc. as the sole tenant of Excelsior Crossings in Hopkins drew the attention of IVG Institutional Funds of Wiesbaden, Germany. IVG paid about $50 million this year for the first phase of the office complex.

Viable secondary market

Buss and others said foreign investors may be migrating to the Twin Cities from overheated commercial real estate markets on the coasts. "They're also increasingly working with U.S. advisers, so there's an education process about secondary markets like ours that is going on," he said.

Pollock said Minneapolis' gradual transformation into a city where people live, work and shop downtown has added to its appeal to foreign investors looking for commercial properties.

Buss agreed. "We're a lot closer to that than places like Indianapolis and Kansas City," he said. "Investors perceive 24-hour cities as healthier places, where rents will grow."

The recent addition of light-rail transit and plans to expand the system also gives the Twin Cities an edge.

"Light rail has really resonated with foreign investors," Buss said. "These are people that come from cities built around mass transit. The fact that Excelsior Crossings will be across from a future light-rail station was something that did not go unnoticed by our foreign buyer."

Susan Feyder • 612-673-1723