CHICAGO—Foreign investors have long flocked to the top gatewaymarkets like New York, San Francisco, and Washington, DC, butincreasingly these individuals and institutions are poking aroundsecondary markets throughout the US, a reflection both of theAmerican economy's strength and the transparency provided by thecountry's real estate laws.

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“We've had a great deal of foreign investment for decades,”Bruce Miller, the Chicago-based internationaldirector for JLL, tells GlobeSt.com, and manyfactors can turn the spigot on or off, including things likeadjustments in currency exchange rates. But the way it typicallyworks is at the beginning of an economic recovery, money flows tothose gateway cities, but now that the recovery has taken hold,many foreigners have found the pricing there too aggressive andhave shifted their focus to cities like Chicago, Houston andSeattle.

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“Secondary is a very relative word,” Miller admits, and someobservers may not consider those cities truly secondary. Still, “weare starting to see South Korean investors coming into Chicago,”and that represents a big shift. In 2011, for example, a group ofHong Kong and South Korean investors bought the 57-story 70 W.Madison for about $344 million. The group now has the building upfor sale. And Miller led the sales team that handled the 2013purchase by Mirae Asset Global Investments, aSouth Korean firm, of the 31-story 225 W. Wacker for $218 million.Also in 2013, a group that included South Korean investors boughtthe 50-story 161 N. Clark for $348 million.

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“There was, at least at that point in time, a lot of uncertaintyin South Korea due to the situation with North Korea,” Miller adds.“And sometimes, there can be political instability that drivesinvestment from overseas,” but for the most part, what drivesforeign capital to Chicago is not an occasionally troubledpolitical situation, but the metro area's underlying economicstrength, especially in its office market.

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For one thing, there has been “a significant reduction in newsupply,” Miller says. Typically, developers in the market will addabout twenty-million-square-feet in each decade. In this decade,however, developers will add only about three to four million,increasing the likelihood of rising rents and boosted returns. Andalong with everyone else, overseas investors have noticed theinflow of suburban companies into the CBD. Miller estimates thatthese suburban migrants have taken about 3.5-million-square-feetjust in the last 24 months. And finally, the burgeoning tech sectorin the CBD has attracted a lot of interest, combined with thepresence of a host of tech incubators including the region's manyuniversities. “I think a lot of foreign investors have realizedwhat an incredible talent pool we have here.”

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In addition to South Korean investors, German, Chinese, Canadianand Israeli firms have made big Chicago purchases. A subsidiary ofJapan-based Sumitomo Corp., for example, just paid$111.5 million for the 27-story 203 N. LaSalle St., the first suchChicago investment by a Japanese group in nearly a decade. The factthat Sumitomo was unfazed by the upcoming departure of DLAPiper, the building's anchor tenant, is perhaps the bestillustration of foreign investors' confidence in the city's officemarket. And China-based Cindat Capital Managementwas part of a group that just bought 311 S. Wacker for $304million. “We know of several other Chinese groups that are outthere looking,” Miller adds.

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But foreign investors have also targeted cities beyond Chicago.In the last year, foreign buyers have scooped up four Dallas officebuildings. Brookfield Asset Management out ofCanada paid $68 million for Riverside Commons, and the JapaneseKajima Corp. purchased One Telecom for nearly $42million. Gruppo Haddad of Mexico bought the othertwo. Meanwhile, Bahrain-based Investcorp purchasednearly $100 million worth of student-housing properties in Austinlast November.

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“Nashville is also a great example,” Miller says, of a city onceconsidered off the beaten path now getting significant looks fromforeign institutions. Furthermore, German investors have gottenactive in Minneapolis and Pittsburgh and Canadian investorsthroughout much of the Midwest. “These cities are not perceived asbeing on the same global scale as Chicago,” but each has sectorswith tremendous growth prospects.

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Chinese investors, for example, sensing an opportunity in theresidential market, have even started buying up property inDetroit's CBD, not normally considered a magnet for outsideinvestment. As reported in GlobeSt.com, however, many corporations have moved downtown, and thousandsof their employees have filled up every nearby apartment building.Perhaps in response, last fall China-based DongduInternational used an online auction to buy three olderdowntown skyscrapers. The company has talked about transforming thecollection into residential use but has not made any finaldecisions.

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But the health of a particular US city's real estate market isnot the only factor bringing in foreign investors. According toMiller, a representative of a high net worth family in SouthAmerica who doesn't want to be named told JLL that transparency inthe US market is one of the key reasons they choose markets likeSeattle, Portland and Pittsburgh for their commercial real estateinvestments.

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“We focus on places where we can understand the legislation andthe ground rules,” he said. “Where you really feel like if you haveto go to court, you'll be well protected and corruption levels areat a minimum. That's a key feature.” JLL's latestTransparency Index ranks the US as thesecond-most transparent country in the world, behind the UnitedKingdom.

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“All in all, it's good news for our clientswho are selling,” Miller says. “We have every reason to believethat this will continue for the next several years.”

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Brian J. Rogal

Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.