Norway has vaulted to the top ranks of foreign U.S. commercial real estate buyers as its $870 billion sovereign-wealth fund, the world’s largest, acquires buildings from New York to San Francisco.
The country has spent more than $3.2 billion on U.S. real estate this year, including the assumption of debt, according to research firm Real Capital Analytics Inc. and statements from the wealth fund. That makes it the biggest international buyer after Canada. The total is more than double the amount spent in all of 2013, when Norway ranked No. 6 for property purchases.
Norway, which has a smaller population than New York City, is spending billions of dollars on properties globally as its wealth fund seeks to meet a target to invest as much as 5 percent of its assets in real estate. In the U.S., prices for top-quality buildings in major markets are being driven up by foreign funds that often are willing to accept lower yields than domestic buyers in return for a safe place to put their money, according to research firm Green Street Advisors Inc.
“There’s an element of perceived safety in a hard asset in the United States, in New York City, that is harder to replicate in other alternatives,” said Michael Knott, a managing director at Newport Beach, California-based Green Street. Investors such as the Norwegian fund “have the ability to hold indefinitely and probably not be troubled at all by a low going-in yield.”
Norway’s most recent U.S. deal was the $1.5 billion acquisition last week of stakes in three towers from Boston Properties Inc., the largest U.S. office real estate investment trust. The wealth fund agreed to buy 45 percent stakes in 601 Lexington Ave. in Manhattan, once known as Citigroup Center, and in Boston’s Atlantic Wharf Office Building and 100 Federal St.
The deal’s capitalization rate of 3.8 percent approaches the record-low investment yields from the prior property boom in 2007, according to Green Street. Cap rates are net operating income divided by purchase price.
Norway’s wealth fund began buying real estate outside Europe last year. It held $10.3 billion of property worldwide as of June 30, or 1.2 percent of total assets at the time. Norges Bank Investment Management said in June it plans to increase staffing by about 60 percent in the next three years to tackle increased investments in real estate.
Karsten Kallevig, chief investment officer for real estate at the Oslo-based fund, began his U.S. foray in February 2013, through a joint venture with TIAA-CREF for stakes in five office buildings. Earlier this month, Norges Bank Investment Management bought a 49.9 percent stake in San Francisco’s Orrick Building for $139.7 million through its alliance with the money manager.
Thomas Sevang, a spokesman for the wealth fund, declined to comment on its real estate purchases.
Demand from sovereign-wealth funds and foreign pension funds is driving cap rates lower “at the margin,” said Spencer Levy, head of Americas research at Los Angeles-based CBRE Group Inc., the largest commercial brokerage. Such buyers have a strong appetite for prime real estate and can afford to pay more because of their low cost of capital, a trend likely to continue if fixed-income yields remain low, he said. The yield on the 10-year Treasury note has risen almost 20 basis points this month to 2.54 percent. A basis point is .01 percentage point.
“If the relative value of real estate -- notwithstanding the fact that the absolute price appears high -- is better than other alternatives, you’re still going to maintain strong price stability,” Levy said.
The Canada Pension Plan Investment Board in June spent $108 million to increase its stake in the One Park Avenue office building in Manhattan to 45 percent, from about 11 percent, through a joint venture with Vornado Realty Trust. In May, a partnership led by the property unit of the Ontario Municipal Employees Retirement System agreed to buy five Boston-area office buildings from Blackstone Group LP for $2.1 billion.
Foreign investors account for about 20 percent to 30 percent of commercial real estate transactions in dollar terms in New York and Washington, compared with 10 percent to 20 percent in areas including Los Angeles, San Francisco and Houston, said Michael Sobolik, regional director of research for North America at Dallas-based Invesco Real Estate, which manages about $61.5 billion globally.
“Sovereign wealth funds tend to focus their transaction activity on large-sized assets,” he said. “Thus they exert more impact on this segment of the market.”
Foreign investors typically buy less than 50 percent of individual U.S. properties to avoid incurring taxes under a 1980 U.S. law when they sell.
In January, Norges Bank Investment Management bought stakes in 66 U.S. warehouse properties through a $1 billion venture with Prologis Inc., the world’s biggest industrial landlord. In July, it bought a stake in One Beacon St., a Boston office property, through a venture with MetLife Inc., the largest U.S. life insurance company. Norges Bank Investment Management also holds shares of publicly traded U.S. REITs, including shopping-center landlords.
The fund, as a relatively new buyer to the scene, “does shrink the space available in an auction tent that was already crowded,” said Knott of Green Street. “Anytime you add in a motivated buyer with a big checkbook, that is going to at the margin increase asset values, but I don’t think it’s quantifiable.”
Canada has been the biggest foreign buyer of U.S. real estate since 2010, according to Real Capital. Canadian investors have acquired stakes in properties worth $8.3 billion this year, after $11.1 billion of deals in all of 2013, according to the New York-based company.
Norway, Western Europe’s biggest oil and gas producer, puts most of its petroleum revenue into its global pension fund, which invests 60 percent in stocks, 35 percent in bonds and 5 percent in real estate.