$800-millionpurchase

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"There's a new baseline for pricing being established for classA office in Midtown, which is a very healthy sign for themarketplace," says Dan Fasulo, managing director and head ofresearch for Real Capital Analytics. He says that baseline is about10% to 15% lower than it was at the peak of the market. "That makessense, because the tremendous amount of liquidity on the debt sidecreated a 10% to 15% froth in pricing levels from the end of 2006through mid-2007, and the froth has been shaken out."

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Fasulo adds that following "a huge disconnect" between buyersand sellers that hampered trading velocity over the past six tonine months, the big deals will help re-establish momentum. "Nowthat some of these properties are starting to trade and it's verysavvy investors who are making these purchases, the rest of themarket will go forward at this new confidence level," he says.

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The sale of a 90% stake in the iconic tower at 405Lexington Ave. to the Abu Dhabi Investment Council follows by a fewweeks Boston Properties' $4-billion purchase of the General Motorsbuilding at 767 Fifth Ave. and Shorenstein's $930-millionacquisition of a controlling stake in two other Macklowe Propertiesofficeassets, There's also a $1.45-billion deal in the works forthe Paramount Group to take the 1.8-million-sf 1301 Ave. of theAmericas. "There's no question that sales volume is down, but thereare these prolific trades going on right now," Fasulo says. "If welook at the composition of buyers, it's the equity-rich orcash-rich buyers that are winning bids. They're the types of buyersthat would have been outbid last year by your more highly leveragedprivate buyers."

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In the case of the Chrysler and GM building sales, overseaswealth funds were part of the equation of cash-rich buyers, andreal estate attorney Marc Shapiro sees their activity herecontinuing. "The motivation of the wealth funds around the MiddleEast is to diversify their portfolio, to create a long-term,sustainable investment strategy for their own economies," saysShapiro, a partner in the New York office of Orrick, Herrington& Sutcliffe LLP and a member of the firm's real estatedepartment. "From that perspective, I believe that we will see alot of activity in the US in the coming 24 months."

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Given the liquidity issues besetting the US economy at present,Shapiro says, "we should welcome the investment of these wealthfunds. They're responsible, conservative investment professionals,and the contribution they're making to our economy right now isunique. We should be less concerned about the motivation of foreigninterests to invest in the US, because without them, we would beunable to sustain some very important segments of our owneconomy."

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Foreign investment has accounted for more than 48% of YTDinvestor dollar volume in Manhattan commercial properties,according to Cushman & Wakefield's midyear report issued lastweek. Lack of supply and a weak dollar were cited as key factors inboosting foreign investor volume from the 12% to 15% levels seen inrecent years.

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Additionally, in the 2008 annual survey of the Association ofForeign Investors in Real Estate, the US was deemed the "moststable and secure" country for real estate investment and thecountry with the best opportunity for appreciation. AFIRE's survey,conducted in Q4 '07, also found that New York City had vaulted tothe top of the worldwide list of cities for foreign investment,followed by Washington, DC. The two US cities elbowed last year'schart-topper, London, into third place. And despite publicperception that wealth funds are tied to Middle Eastern countriessuch as Kuwait or Dubai, the second largest state-owned fund in theworld is reportedly Norway's Government Pension Fund, similarlydriven by petrodollars and valued at $400 billion.

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And while the wealth funds have come into prominence over thepast 12 months, Shapiro says the basic idea is nothing new."Virtually every major real estate owner and developer has acapital partner behind them," he says. "The wealth funds haveemerged in the past 12 months as a ready source of investmentcapital. But this is not a novel idea. There are large investmentfunds in the US that have been providing the capital to drive realestate for the past 100 years, if not longer."

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Will foreign investors keep up the pace in Manhattan and othermajor real estate markets after the supply of available trophyproperties runs out? Shapiro and Fasulo say yes. "The wealth fundsare looking for one of two things: either iconic properties thatare universally recognized or the kinds of returns we wouldassociate with any opportunistic real estate investor," saysShapiro. "They will look beyond the iconic properties if they canpartner with an operator with a superior track record and aspotless reputation. Their challenge is in performing due diligencefrom a distance of 6,000 miles."

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Fasulo adds, "there's a perception out there that this is dumbmoney. That's a pretty naïve view of how sophisticated some ofthese wealth funds have become over the years. Many of them haveoperations just as sophisticated as the top institutional investorshere in the US. They're going to go where the opportunities are.Unless the dynamics change significantly, I see this continuing togo forward as we've seen in the past six months."

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.