Japanese investment likely to level off here

Japanese investment in Chicago area real estate is likely tolevel off after a sharp decline last year, said Dale Anne Reiss,managing partner of the Chicago office of Kenneth Leventhal & Co.

"I don't think we'll go down," said Reiss, whose firm recentlycompleted a nationwide study of Japanese investment. "I look forsteady investment.

"I think you still get a big bang for your buck - or yen," shesaid. "Chicago prices are still relatively affordable compared toeither coast. Yet the quality of the city is of equal or bettercaliber.

"Chicago is truly a world-class city, so they get the sameadvnatage without the same cost."

The decline of new investment to $106 million from 1988's boomyear of $187 million probably caused xenophobics to smile anddevelopers to frown. It magnified a national trend of an 11 percentdecline of Japanese investment, according the study by Laventhol, anational accouting firm.

Across the United States, Japanese investments in 1989 totalled$14.77 billion, down from the record $16.54 billion of 1988. It wasthe first decline in five years.

But be careful about jumping to conclusions. Yes, the Chicagodrop reflected a national decline, but it also was a function oftiming, Reiss said.

Some deals closed already this year might just as easily beendone last year. For example, the Aoki Corp. purchased a number ofhotels from Swissair in March, including the Swiss Grand in IllinoisCenter.

Also, "much of the 1988 Japanese investment in Chicago was inraw land and new construction, which often requires several years fordevelopment," Reiss said. "Investors frequently don't look for newinvestments until previous projects are completed."

In addition, Chicago still ranks fourth among U.S. cities whenmeasuring cumulative Japanese investment in real estate.

"Through 1989, investment (in Chicago) totaled $3.06 billion -5 percent of all Japanese investment in this country," Reiss said.

Among Chicago projects that were financed at least in part byJapanese is the Quaker Tower, Prudential Plaza, Madison Plaza, 225 W.Wacker, 100 N. Riverside and Hotel Nikko.

Leventhal officials cite several reasons for the over-alldecline.

"Right now there are attractive investments elsewhere in theworld," Reiss said. "Japan's largest institutional investors areexamining Western European markets as the 1992 deadline for economicunification gets closer."

Investment in the Japanese economy also rose, while the numberof available U.S. "trophy properties" has declined, said Jack Rodman,managing partner of Leventhal's Los Angeles office. There also maybe a public-relations concern.

"I think to a certain extent, the slowdown reflects theirsensitivity to the acquisition of symbolic or national assets likethe Sears Tower or Rockefeller Center," Rodman said. "One of thelargest groups to reduce their investments were Japanese lifeinsurance companies, which are closely regulated by the Ministry ofFinance, which had advised Japanese companies to be cautious."

The outlook for the United States, and Chicago in particular,also may be clouded by other factors.

"Commercial real estate in Chicago and the rest of the countryis undergoing a reassessment period," Reiss said. "There's been somuch building."

The sharp drop in the Japanese stock market recently probablywon't have a big impact here. weeks.

"If they're using dollars that are profits (from stocks), itcould be a minus," she said. But real estate often is used tobalance a portfolio, so the stock decline also could be a plus, shesaid.

Leventhal projects Japanese investment in the United States tobe $13 billion to $16 billion in 1990.

The players and the sites may continue to change.

Instead of big pension funds, insurance companies and banksfinancing deals, syndicates of many individual investors may enterthe picture, said Reiss.

"They'll go to smaller projects and also second-tier cities"such as Minneapolis, Detroit, Kansas City and St. Louis in the theMidwest, she said. "It's a moving market, Three years ago, Chicagowas considered a second-tier city."

The move to smaller cities also should ensure a continuingdecline in the size of transactions. After peaking at $150 millionin 1987, the average deal dropped to $50.8 million in 1989, the studyshowed.

As for concerns that Japanese investors soon will own all ofAmerica, Reiss said, "Even with investment gains during the last fiveyears, Japanese investors still own only a small percentage of U.S.commercial real estate, estimated in the range of 2 percent."