Middle East investment is expected to be flat or down this year compared to a banner year in 2007.
More than half way through the year, Mideast investors have shelled out $2.7 billion (Dh10bn) for US assets, according to Real Estate Analytics, a New York-based real-estate research firm. But at that pace, this year's total sales will likely fall far below last year's $8.2bn in deals.
Two Middle Eastern buyers recently snapped up New York's Chrysler Building and General Motors Building for an estimated $3.7 billion. But their acquisitions of the two trophy offices belies their waning interest in US commercial real estate this year as the US economy stumbles and property prices dip.
Earlier this month, Abu Dhabi Investment Council, one of the world's largest sovereign wealth funds, bought a 75 per cent stake in the Chrysler Building for an estimated $900m. In June, Dubai-based Meraas Capital was part of a joint venture that bought the General Motors Building for about $2.8bn.
Other countries have pulled back their investment in US real estate and the disruption in the credit markets has halted many deals. At midyear, sales of office buildings were just a third of last year's total through the first half. Retail property sales were down 62 per cent; industrial sales down by half; and apartment sales down by 45 per cent.
Prices, especially in suburban markets, have started to slip, making many investors jittery about getting into a sliding market. And the economy, on uncertain footing, could hurt property occupancy rates and rents as tenants give back space or scrap expansion plans.
But the current investment conditions have pluses for cash-rich Mideast investors who have been able to grab landmark buildings, which are more likely to hold their value even in a lackluster market. "They're using this environment to win deals they might not have won last year," said Dan Fasulo, managing director of Real Capital Analytics. He said the Chrysler Building would have gone to an investor armed with easy financing if the deal had occurred the same time last year.
These investors are zeroing in on New York City, which accounted for nearly a quarter of all office sales in the first half of the year.
New York ranked as the top spot worldwide for foreign commercial real estate dollars, according to a survey conducted in the fourth quarter of last year, up from No2 the year before. The survey was released in January by the Association of Foreign Investors in Real Estate.
So far this year, property prices have more than held up in Manhattan. The average price per square foot for a Manhattan office is $877, up 24 per cent from $705, according to Real Estate Analytics. "There's a notion it's a safe haven, that markets like New York City are ultimately going to retain their value," said Joseph Gulant, a partner at law firm Blank Rome, which helps negotiate commercial realty transactions.
Gulant expects property values in more popular cities such as Chicago, Houston and San Francisco to weather the commercial real estate slowdown better than others and will continue to draw foreign interest.
US real estate has competed heavily for foreign money with properties in emerging markets such as China, Russia and India. But foreign investors overwhelmingly believe the US offers the most stable and secure real estate investments, according to the Association of Foreign Investors in Real Estate.
However, investing in the US can get dicey for Middle East investors as they encounter what could be considered xenophobic sentiments in the US.
"There's some reaction in the Arab investment community to some of the difficulties of doing business here," especially following the political backlash over a US ports deal two years ago, said Scott Arnold, the head of the real estate law group at King & Spalding.
Some members of the Congress have raised concerns over the intentions of sovereign wealth funds in making investments in the US. Aside from real estate, sovereign funds from China, Singapore and the Middle East have invested more than $40bn in Citigroup, Merrill Lynch & Co, and Swiss bank UBS (which has a large US presence) since late last year.