Ten years ago, German investors dominated the bidding for blue-chip New York City office buildings, winning such trophies as Lever House and the Seagram Building. Now, even though Germans are still chasing the top office properties and have even more money to plow into U.S. real estate, they are facing new competition from pension funds, REITs and other domestic buyers willing to outbid the long-time “uber-bidders.”

For sellers of Class-A, well-leased office product, the competition has been a windfall as bidding for such properties has driven prices into record territory. A recent example is 399 Park Ave., which sold for $1.06 billion — a record $630 per sq. ft. — after a German bidder lost out to Boston Properties. The contest for 399 Park Ave. is just one of many examples in which German bids for Class-A Manhattan properties fell short.

What's happening? The rough leasing climate has made the top properties even more desirable because they tend to do well even if the economy is soft. That is drawing more U.S. buyers. “The Germans favor Boston, Washington, D.C., New York, San Francisco, Chicago and Los Angeles,” says Noble Carpenter, international capital liaison and managing director of Jones Lang LaSalle's New York office. “In these Big Six markets, the Germans are going up against U.S. pension funds, and the pension funds are even more aggressive.”

German investors also are competing against well-positioned REITs like Vornado Realty Trust and Equity Office Properties. “There are just so many sources of aggressive capital chasing real estate right now, and there is a dearth of alternative investments out there,” says Carpenter.

Attractive U.S. Market

German investors such as Jamestown and Paramount Group are unlikely to back off. The tepid recovery from last year's recession in Germany makes the U.S. recovery look robust. And the returns on U.S. commercial real estate are particularly enticing.

On top of that, German funds have more money to invest abroad because of changes in that country's securities laws. The Fourth Financial Market Promotion Act, passed last summer, allows German funds for the first time to invest money from all open-end “spezialfonds” outside of Europe. These funds are capitalized by institutions rather than individual investors. Before the act, only five of Germany's 19 open-ended funds were allowed to invest freely in the U.S.

Much of that new money is likely to flow into U.S. real estate. European investors are accustomed to 4% to 5% yields on European real estate, while returns in the U.S. average between 6% to 8%, according to Andy Merrin, executive vice president of New York-based Cushman & Wakefield.

Even as German investors have suffered some setbacks in bidding wars for top trophy properties, they have been successful in many other situations. Through October, German investors had spent $3.4 billion on commercial real estate in the U.S. In October, German fund Oppenheim Immobilien Kapitalanlagegesellschaft (OIK), Germany's dominant spezialfond operator, announced plans to buy more than $1 billion worth of U.S. commercial properties over the next few years.

Tom Bermingham, executive director of international business development at New York-based Insignia/ESG Inc., says German buyers are a force to be reckoned with. “How long can the market sustain this activity? As long as interest rates are low, there will be more German buyers.”