NKF’s Alex Foshay Talks Int’l Capital Flows and Its Taste for US CRE

Last September, he officially accepted the position of divisional head of international capital markets at the firm.

The trailblazing capital markets professional was born in the United States to a father from New York, who worked in the advertising industry, and an English mother, whose family ran a rather successful steel manufacturing business for years in Sheffield, South Yorkshire, Foshay said. He lived in the Charlottesville, Va. area until he was eight-years-old before setting off to a boarding school in North Yorkshire with his brother, where they stayed until they were 18—that’s where his English accent stuck.

Foshay, one of a handful of NKF international capital markets front men, doubles as a golfer and avid fly fisherman; he’s taken trips into the depths of Russia’s Kola Peninsula to fish rivers for Atlantic salmon. He explained that to get to get there, he’s had to travel to Murmansk and then take a chopper two hours into the Arctic Circle.

He enjoys the peace and serenity.

But similar to his laborious but adventurous travels, Foshay’s business demands the same. NKF’s reach spans all six continents, in 58 countries, with 16,000 employees in 430 offices around the world. “Often people don’t realize how large [our operation really is],” Foshay said.  

In March, Foshay and his team closed on the $429 million trade of a massive San Jose office complex occupied by Micron Technology—sold by PIMCO to Japanese real estate owner and developer Mori Trust, the third largest landlord in Tokyo. His team is the only one to have sold to Mori Trust in the U.S., having also facilitated the firm’s $673 million acquisition of 10 St. James Avenue, a core office asset in Boston’s Back Bay.

Other notable closings include the $270 million sale of Seattle’s Tilt 49, a 291,000-square-foot, fully occupied asset leased to Amazon for 15 years, to Japanese investor Takenaka in December 2017; that was Takenaka’s first purchase in the U.S. In 2016, he closed on Skanska USA’s sale of 101 Seaport, a 17-story, 440,000-square-foot office tower in Boston, which German asset manager Union Investment fetched for $452 million.

He sat down with Commercial Observer recently at NKF’s office at 125 Park Avenue to discuss the global economic slowdown, political turmoil and how international capital is gauging opportunities outside its borders.

Commercial Observer: Considering your work involves executing for first-time U.S. investors out of Asia-Pacific and elsewhere, how do you bring a level of reassurance to a deal?

Alex Foshay: Presenting face-to-face creates that initial touchpoint. I think the sense that you’re going through the effort of really engaging with them in that fashion gives them the sense that they can really compete in the process. I think a lot of international groups—if you go back several years—were treated with a certain level of disdain in some instances and were seen as a useful group to have in the mix but ultimately their bids weren’t seen as being as robust or credible as domestic offers. We ensure that they have on-the-ground assistance with underwriting, and they may hire an external consultant, like an FTI Consulting, to help them out with the deep-dive analysis. But, that probably comes with the second-round bids, that they start going into that process.

Do you find that investors in Asia Pacific put more stock into face-to-face engagements?

Yeah, I do. I think it differs from one country to the next, but, generally speaking, yes. Certainly in Japan, Singapore and Hong Kong I would say that personal relationships there are considered of paramount importance. Many of these are major institutional groups in their own markets, and they’re accustomed to being the biggest dog on the block, so when they come to the U.S., they like to know that they’re dealing with people who understand who they are and respect who they are and are willing to really put in the time in assisting them to achieve their goals here.

Given the current global economic slowdown—and with the surge of investment from some Asia Pacific players and beyond—how does the current late-cycle environment differ from what we saw prior to the recession?

From an international perspective, the causes [of the recession] were seen as being U.S.-led. This created an environment where investors were hesitant about committing further to the U.S. this time around. To the extent that we’ve seen any sort of a slowdown or just moderate corrections in pricing in some markets, we have found that overseas investors’ appetite for the U.S. remains as strong as ever, if not increasing. They don’t see the primary driver for any slowdown in growth coming from the U.S. as it is consistently posting the strongest Western gross domestic product (GDP) figures on an annual basis. They see the current slowdown emanating more from a slowdown in the Chinese economy. And, I think there’s often skepticism, or cynicism, towards the data that’s put out by the Chinese economy and really what the situation is, there, in terms of overall growth. I think some of them take a more pessimistic view than what is being portrayed.

That plays into the theme that the U.S. is the cleanest dirty shirt in the laundry?

Oh, you’re painting a very negative picture on where we are economically, overall, but yes. They see the U.S. as a flight to safety, a safe haven. They see it as the strongest performing economy in the world, and it is a market that presents huge amounts of opportunity in terms of deal flow. If they’re investing, for instance, into central London, they often find not only are they competing against other investors from their own region internationally, they may be competing against other investors from their own specific home market, and they may even be competing against other institutions of a similar type, whether it be two German pension funds going head-to-head for an investment, or two Korean asset managers. The U.S., with six gateway cities, I would argue, presents a level of scale of top-quality investment product that is unrivaled in any market anywhere else in the world.

How would you characterize the level of investment that we’re seeing from Canadian players?

In a word, it’s unprecedented. If you look at the total international capital volume invested in the U.S. in 2018, it was just shy of $95 billion, which continues the general upward trend of international investment into the U.S. We’re still marginally behind our peak year of 2015, where it was over $100 billion. Canadian investment was $48.3 billion of that total. That was including a number of entity level deals. But that figure is the highest annual total of any foreign country in commercial real estate history.

How significant is Singapore’s rise out of Asia Pacific as one of the most prolific overseas investors?

Singapore is an interesting point in sort of the evolution of where overseas investors are coming from, of what type of investments they’re looking for and in what markets they’re looking to invest. The largest sovereign wealth fund out of Singapore, GIC, has been very active in the states for a number of years. Singaporean investors are generally seen as leaders into overseas markets —where they go, others tend to follow. In the case of the Singaporean real estate investment trusts, they are seeking diversification and higher returns than they can achieve in their own region. They’re particularly attracted to non-gateway product.

Are there any global players doing things outside of the box?

Yes, I think overseas investors have undoubtedly become more sophisticated over time. Certain investors globally are required to hedge the equity portion of their investments against the fluctuations in the U.S. dollar. The cost of that has reached as high as 250 basis points on the investors’ unlevered IRR returns, which is a huge drag. It’s since receded to about 150 basis points. Nonetheless, it’s a very significant impact. The effect of that has caused many of them to focus on mezzanine or debt strategies, generally, and specifically mezz positions; we’ve seen that with a number of deals in New York, with groups like Korea Teachers Credit Union. I can tell you from frequent trips to Korea that the demand for that type of debt position is true for really all of the major Korean asset managers, so that would be one example of moving outside of the box. I think another would be the Canadian pension funds in some cases looking towards more opportunistic investment strategies. CPP is backing St. John’s Terminal, and that’s really a direct result of the core space pricing feeling too strong and cap rates being too low, so they’re going to go and pursue opportunistic investment strategies that will give that extra kick in return.

How are international investors gauging Federal Reserve action and growth in the U.S.?

They see the potential for a slowdown probably coming from pressures outside of the U.S., but when we’re on our overseas roadshows we will have a number of investors say to us that they feel that with the raise rates over recent quarters and the obvious associated increased in the cost of debt, that core pricing is not reflective of those adjustments; that’s a message we get from a number of groups, and it’s caused better pools on the really core investment product in the gateway cities to thin. But, it’s not a universal message; it goes to this increasingly sophisticated nature of overseas investors. They’re now looking at different asset classes, like multi-family; they’ll consider retail; industrial has been popular for a long time, but I think you’re going to see a significant broadening in the number of overseas investors pursuing industrial product in 2019.

The industrial story is interesting.

Yeah. The last mile logistics stories is one that they see in their own markets and that they fully understand and it’s something that they want to buy into. It’s the primary industrial nodes like in New Jersey, the Inland Empire [in California] and Indianapolis. I think particularly in the case of industrial there is recognition that they need to be very flexible in where they allocate their capital.

With multifamily being such a hot product among U.S. lenders and investors, from where do you see the most international investment interest in the asset class?

There’s very significant demand from Japan. Obviously, Singapore as I mentioned, and increasingly European institutions and Hong Kong ultra-high net worth investors are interested in the space. There’s really quite a broad base that’s building that wants to get into the space, and these investors, if you go back three years, many of the less institutional ones really had no understanding of what multi-family as a product type was. It’s not very prevalent in many markets around the world, but many see it is an asset class that they increasingly understand. They understand the market fundamentals, the growth in the millennial population and empty nesters that drive demand for multi-family, and they also see it, from an investment perspective, as a fantastic inflationary hedge. Previously they would have seen the short term nature of residential leases as a weakness, but now they see that ability to mark rents to market on an annual basis attractive, just in terms of maintaining the value of their investment during a period of rising inflation.

Do you think foreign investors, being increasing involved in multifamily in the U.S., are more keen to bringing these strategies back home and incorporating them?

I do. If you take London as an example, it’s probably the best; it’s where we’re seeing multifamily, as a product type, growing the fastest. I would say across the board U.K. institutions now have a very strong intent to invest into multifamily and to allocate significant AUM to it. Right now the product just isn’t there, and as a result, U.S. groups who have the expertise in this field have made significant strides into investing into London and developing that type of product, whether it’s Greystar or other major multifamily players. They’re partnering with local U.K. teams and building the expertise in that market and building the general investor awareness of it and taking advantage of the rising demand for rental apartments over outright ownership. They’re contending with a very ingrained mindset in many parts of Europe where home ownership has been regarded has something that you seek to achieve as early as possible, after leaving higher education. That transition that perhaps we saw in the U.S. 10 or 15 years ago is only really starting to take hold now.

When might we see the Chinese really re-enter the fray?

I think the short answer is there is no real way to gauge it, frankly. It’s a system under which power is held in the hands of a few and decisions are highly centralized. I don’t think anyone who holds a firm opinion one way or the other on when Chinese investment is likely to re-enter the market really has any kind of a basis on which gauge that.

Will there ever be a point where there’s just not ample enough room for strong investment in the U.S.?

If there’s not enough room in the U.S., then we’ve got problems. It’s certainly the only market in the world that can handle the level of global appetite for commercial real estate, and that’s the hard truth. I’m an optimist. I see the U.S. as the biggest and best economy in the world. When you’ve lived overseas for a long time, you cease to have any sort of cynical view of the U.S. economy. It’s an amazing thing. I think with the scale that it presents—six major gateway cities and probably 15 fantastic highly performing non-gateway markets, with very strong fundamentals—there is plenty of room for everyone.