Earlier this spring, the magnitude of the coronavirus outbreak and its impact on cross-border investment into the U.S. had yet to be fully quantified. It’s obvious, however, that deal volume is poised to take a significant hit.
If that comes to pass, it might bring an unfortunate end to Israel’s growth as a source of capital for U.S. commercial real estate. That is a trend that had been following an upward trajectory in recent years.
The tiny Middle Eastern country has grown to be a big player, ending last year with $2.3 billion invested in 80 U.S. properties, according to Real Capital Analytics. That’s good for the sixth-largest share (4.5%) of foreign-capital volume invested in U.S. properties. Israel rose three spots from the No. 9 position it held in both 2017 and 2018, climbing the list by edging out historically strong investment sources such as Singapore and Japan. It also was not far from fifth-ranked Hong Kong, which beat out Israel by only $14.4 million.
Year over year, Israeli investments in U.S. properties grew by 38%. This was part of a resurgent Middle Eastern contingent that also saw massive annual increases from Bahrain (36%), the United Arab Emirates (164%), Turkey (865%), Qatar (69%) and Saudi Arabia (297%).
Investors headquartered in Israel were particularly keen to act in the first half of last year, with some seeking stability in the U.S. multifamily-housing market. In May 2019, for example, a subsidiary of Israeli conglomerate Delek Group, one of the country’s largest companies, bought a portfolio of garden apartments from Dallas-based Lone Star. That purchase included four properties in the Baltimore market, accounting for 64% of the metro area’s inbound capital for the year and helping year-over-year investment there to grow by a whopping 1,682%.
Other Israeli companies, meanwhile, poured money into Class A office space. In March 2019, Migdal Insurance (Israel’s leading insurance provider and pension fund) was part of a group that acquired the iconic BNY Mellon Center, Philadelphia’s fifth-tallest skyscraper, in a $451.6 million deal with Equity Commonwealth.
Three months later, Migdal closed on a 35% interest in a 31-story Manhattan office building next to Grand Central Station. The transactions continued an aggressive run by Migdal in pursuing premium office properties. In late 2018, the company contributed $75 million to a $3.3 billion acquisition of Forest City Realty Trust, a real estate investment trust with an $11.5 billion portfolio that includes the New York Times building in midtown Manhattan.
Fast forward to 2020, however, and the landscape looks quite different, thanks to the aforementioned coronavirus outbreak. And if that weren’t enough, adding to the likelihood of an Israeli pullback is the instability of the big-spending Delek Group, whose main business ventures are oil and natural gas. As oil prices plummeted earlier this year, so did Delek’s stock price, with observers of the Israeli financial scene openly wondering if the company has designs on bankruptcy or a bailout.