Areas of Interest
So just what kinds of apartments did the Japanese investors need to buy in the States to get their depreciation? Here’s a hint: It wasn’t the properties they bought in the ’80s.
“Their focus was on the wood-frame buildings that were over 20 years old,” Duffy says. “On average, I would call it a C-plus apartment in urban neighborhoods with working-class residents. It took advantage of a depreciation feature in the Japanese tax laws. They ended up being successful partnerships for both them and us.”
Clauson’s strategy for his Japanese investors is similar. “We’re not looking at the trophy properties, which Japanese had looked at in the ’80s,” he says. “It’s a little different strategy. Our strategy is to look for more middle- and low-income properties. Regardless of whether the economy is booming, they will do OK.”
Köhler directs his European clients to value-added properties. “Luxury multifamily housing has begun to lose attractiveness because of cap rates and pricing,” he says. “We are focusing on B and C class properties, with low replacement costs, and apply a value-added strategy in cooperation with locals. Accordingly, we acquire B and C properties built in the 1980s, add value to them, and put them back on the market again.”
European Property Consulting seeks these B and C properties in out-of-the-way markets. “What we like are overlooked secondary and tertiary markets, as they offer positive cash flow opportunities,” Köhler says. “We are still very bullish on these markets. Demand from echo boomers, aging baby boomers, and an increasing number of immigrants is fueling demand for multifamily properties across metropolitan areas, especially in the Southeast.”
At first, Lexington focused on just one market. “We initially focused on California because it was extremely easy to get to [from Japan], and the economic outlook and growth looked good there,” Clauson says. “As time passed, that market became expensive and difficult to buy in.”
So the group is branching out. “We focus on cities with positive population growth and positive job growth,” Clauson says. “We look further across the U.S. to find opportunities that make sense. We will widen our net in terms of where we look to find properties.”
The Japanese aren’t the only group widening its net in search of investments. Over the past couple of years, Middle Eastern investors have also scoured the country in search of property. In 2004, the Elad Group Florida, a Miami Lakes, Fla.-based group with Israeli investors, bought four properties for condo conversions on the East Coast. Earlier this year, the group bought three properties in Boca Raton and Weston, Fla.
Other Middle Eastern investors even found their way into the heart of the United States: Kansas City, Mo. “They were looking for American multifamily opportunities,” says Mac Crowther, a principal with ARA Realty’s Kansas City, Mo., office. “They were attracted to the Midwest and Kansas City because of the predictability of our market. They liked the solid returns they could see in the next seven years.”
