When New York's iconic General Motors and Chrysler buildings were sold earlier this year, thanks in part to an injection of foreign capital, comparisons to the 1980s when Japanese investors poured billions of dollars into some of America's most prominent real estate, were inevitable.

New York-based research firm Real Capital Analytics estimates that foreign investment in U.S. real estate approached $4.17 billion in the third quarter. While that's a healthy figure, it pales in comparison with the all-time high of $6.46 billion notched in the second quarter of 2007. This time around the major players are based in oil-rich countries like the United Arab Emirates, Kuwait and Norway, as well as South Korea.

“We're seeing some big deals happen every day,” says Robert White, president of Real Capital Analytics.

But the turbulence involving Lehman Brothers' filing for Chapter 11 bankruptcy protection on Sept. 15, the swift sale of Merrill Lynch and the government's rescue of insurance giant AIG, have made some overseas investors wary of U.S. markets.

“This whole Lehman thing has everybody stopping to wait and see what will happen,” says Steve Collins, managing director of Jones Lang LaSalle's international capital group. “Some investors are still waiting for distress, and they're thinking prices might go down at the end of the third quarter after this Lehman thing settles.”

Foreign buyers likely will be more cautious for at least the remainder of this year until a semblance of stability returns, adds Collins.

Foreign buyers snare GM trophy

The largest of the recent mega deals was the $4 billion sale of New York's GM Building along with three New York office towers at 2 Grand Central, 125 West 55th Street and 540 Madison Avenue by Harry Macklowe to a group that included Boston Properties, Goldman, Sachs & Co. and a joint venture of the governments of Kuwait and Qatar.

In June, the Chrysler Building sold to the Abu Dhabi Investment Council for $800 million. And in late August, Israel-based Africa Israel Investment sold stakes in two Manhattan office towers to an unidentified Chinese investment fund for $200 million.

One of the biggest questions today is what impact Wall Street's travails might have on foreign investment trends. The U.S. government's takeover of Fannie Mae, Freddie Mac and AIG, plus Lehman's bankruptcy and subsequent sale in part to U.K.-based Barclays PLC, may signal a market bottom and trigger a buying opportunity for foreign capital.

Collins has met with at least 25 foreign investors — groups from Norway, Spain and South Korea, in particular — who are examining U.S. properties for purchase. None has previously invested in the U.S.

“They are looking to get into the States through direct investments, joint ventures and debt,” says Collins. “There are still a lot of people looking to place money, and the majority of them are from the Asia-Pacific, Spain and Norway. Their economies have risen quickly and now they want to get their money out throughout the world, and the U.S. is a good place for it.”

Several major investment groups are gearing up to launch U.S. investment programs, Collins says. The largest is the $370 billion Norwegian Government Pension Fund, which is ready to invest some $30 billion in foreign real estate, with the U.S. as a potential target. Earlier this year, the fund hired a group that owns U.S.-based Pension Consulting Alliance, the prominent advisor to several top American pension funds.

The investment role of South Koreans is rapidly changing, following recent updates to complicated Korean tax laws that now provide more incentives for investing overseas. “This time last year there were probably seven Korean investors, but by the end of this year, thirty or so will have been formed to invest money outside their region,” says Collins.

In June, South Korea's Mirae Asset Maps Investment Management bought the Citigroup Center in downtown San Francisco for $370 million. The deal marked the largest U.S. real estate investment by a South Korean property fund. In September, a group from Jones Lang LaSalle's Singapore office visited Seoul to meet with a dozen companies interested in U.S. investments.

History repeats, minus the backlash

In the 1980s, the level of foreign investment in U.S. real estate created something of a stir after Japanese firms bought the landmark Rockefeller Center in New York and Pebble Beach Country Club in California.

“The acceptance of foreign investment in the U.S. has been a huge change,” says Jim Fetgatter, CEO of the Washington, D.C.-based Association of Foreign Investors in Real Estate (AFIRE). “The backlash against the Japanese in the 1980s was one of the reasons AFIRE was founded. You see a little bit of that crop up with the sovereign wealth funds, but generally people are okay with it.”

The volume of U.S. investment overseas dwarfs the incoming funds. Since 2007 U.S. firms have acquired $130 billion of commercial properties outside the country, Real Capital Analytics reports, while foreign investors spent $43 billion on acquisitions in the States over the same period.

“Our biggest competition is people who sell funds to invest in India or China and the emerging markets like Brazil versus the U.S.,” says Clay Adams, chief investment officer for Jamestown, the largest North American money generator for Germany's open-ended pension funds. Since 1982, the funds have invested $6 billion. “Everyone wants to be globally diversified and the Europeans are the same way,” says Adams.

Weak dollar isn't the draw

According to a survey of AFIRE members, whose organizations own about $700 billion of global real estate and $230 billion in the U.S., the weak U.S. dollar does not drive foreign investment. In fact, 85% of AFIRE members said currency fluctuations had little effect on their decisions, since their strategy is to invest for the long term.

Jamestown's Adams points out that the appeal of U.S. commercial real estate is offset by the country's weakening economy and high budget and trade deficits. That issue could be exacerbated by the federal bailout of financial firms.

And prices are not as low as some visitors expected, says Collins. “A lot of foreign investors still think when they come to the U.S. there is going to be a foreclosure sign on the Empire State Building.”

German investors have long dominated foreign buying in the U.S., primarily since 1989, when a U.S.-German tax treaty allowed German investors to pay taxes at U.S. rates rather than higher German rates.

Atlanta-based Jamestown has been Germany's largest closed-end fund syndicator in North America for more than a decade. But even Jamestown recognized that the frothy U.S. markets could not last forever. By 2006, Jamestown had sold substantially all of its trophy assets, including 1211 and 1290 Avenue of the Americas in Midtown Manhattan for a combined total of nearly $3 billion.

Two years ago Jamestown changed direction and started a series of “entrepreneurial” opportunity funds. Its newest opportunity funds are projected to raise more than $1 billion, but unlike the firm's previous 26 funds, which targeted core assets in major cities, the new breed is targeting new development sites, distressed land and turnaround opportunities in secondary cities including Savannah, Charleston, S.C., Raleigh, Chattanooga and other Sunbelt cities.

“We're different in that we haven't been focused on these trophy buildings that most foreign buyers are focused on. We made a decision a few years ago to move in a different direction,” says Adams.

Gateway to deals

Foreign investors have a solution for where to put the bulk of their dollars in the States. “It's pretty simple, it's gateway cities,” says Collins.

Geographically, European and Middle East investors tend to concentrate on the East Coast, while Asia-Pacific entities are attracted to the closer West Coast.

In April, Irish investor Vico Capital paid a record $867 per sq. ft. for 2099 Pennsylvania Avenue in Washington, D.C. Vico outbid an unnamed group from Dubai, sealing the deal for the office building at $172.5 million.

On AFIRE's annual investor survey, for the first time, New York City topped foreign investors' wish list, followed by London and Washington, D.C., which tied for second. According to Fetgatter, New York did not rise so much as other markets fell out of favor.

“The fact that New York and D.C. were both up at the top was big news,” says Fetgatter. “And even more interesting is what happened to London. London had been number one for quite some time. I suspect that it may drop even further next year, and that could favor more U.S. investment.”

Ben Johnson is a Dallas-based writer.

See also: Sovereign wealth funds under scrutiny