THE WALL STREET JOURNAL. Wednesday, January 11, 2017 |B9
THE PROPERTY REPORT
Wakefield’s student-property-
investment team.
After such a strong year,
some investors have voiced
unease.
“One thing I’m wary of is
the herd effect,” Mr. Kurata of
AXA said. “People are chasing
yield, but higher yield comes
with higher risk.”
In health care, for instance,
landlords need to make sure
their tenant is providing qual-
ity service, he said. And be-
cause the sector is heavily reg-
ulated, understanding where
government policy is moving
is important.
“You shouldn’t go into anasset class if you don’t fully
understand the operating
risks,” he said.
Another potential pitfall for
alternatives: Because these
markets are smaller, they are
typically less liquid.
“It’s easy to get into these
sectors, but more difficult to
get out,” said James Petit,
head of real estate in the U.K.
and Ireland at the asset-man-
agement arm of German
lender Deutsche Bank AG.
Deutsche Asset Manage-
ment invested in alternative
real estate such as gas stations
and marinas before the 2008
financial crisis.It has yet to go back,
mostly because its clients are
uncomfortable with the risks,
Mr. Petit said.
Strong demand for alterna-
tive-property assets is ex-
pected to continue this year,
said Tom Leahy, director of
analytics at Real Capital. The
U.S. Federal Reserve has
started to raise interest rates,
but European central banks
aren’t expected to follow
quickly.
With interest rates set to
remain low, “investors looking
for income will increasingly
look to the alternative-prop-
erty sector,” Mr. Leahy said.A New York real-estate de-
veloper is playing a central
role in blocking a bipartisan
plan to overhaul a controver-
sial immigration program that
gives green cards to foreign
investors.
Related Cos ., a developer
of massive mixed-use projects,
has waged an aggressive cam-
paign to head off proposed
changes to the so-called EB-5
program in an apparent effort
to keep low-cost money flow-
ing to luxury urban projects
such as its $20 billion Hudson
Yards development in Manhat-
tan.
The EB-5 program offers
green cards, allowing for per-
manent legal U.S. residency, to
immigrants who invest at least
$500,000 in certain U.S. busi-
nesses measured to create at
least 10 jobs per investor. The
program allows 10,000 visas a
year.
At the heart of the fight is
that developers including Re-
lated use a provision meant
for rural and high-unemploy-
ment areas in order to bring
financing for luxury projects,
often in some of the most ex-
pensive neighborhoods in the
country.
Critics decry the practice,
known as gerrymandering, be-
cause it involves creating spe-
cial districts that link the lux-
ury projects with economically
struggling neighborhoods.
They say it sucks money away
from distressed areas that
could most use the invest-
ment.
The developers say entire
regions benefit from projects
in central cities, which they
say create jobs everywhere.
BYELIOTBROWN
pools together EB-5 funding
from foreign investors.
A key provision of the EB-5
law, which took effect in 1990,
was due to expire in Septem-
ber 2015, but has been given
three short-term extensions
since. Foreign investors have
rushed in under the existing
rules well past the program’s
capacity, with applications
pending from more than
20,000 immigrant investors—
roughly six to seven years’ ca-
pacity of visas given that in-
vestors typically bring family
members.
The latest four-month ex-
tension keeps the program
alive until April, when many
developers, including Related,
have said they hope the politi-
cal environment will favor a
long-term extension given that
President-elect Donald Trump
is a real-estate developer and
his son-in-law, Jared Kushner,
has used the program. Mr.
Kushner, named Monday as a
White House senior adviser,
will recuse himself from EB-5-
related issues, his spokes-woman said.
A Trump transition spokes-
person didn’t immediately re-
spond to a request for com-
ment on the EB-5 program.
A bipartisan group of law-
makers pushing for changes to
the program is growing frus-
trated. The provision meant to
direct money to struggling ar-
eas “has been rendered obso-
lete,” said Sen. Patrick Leahy
(D., Vt.) after the latest at-
tempt at a compromise early
last month failed. “Anyone
who maintains today’s EB-5
program is about creating jobs
is either a lobbyist for the
real-estate industry or simply
not paying attention.”
In 2015, Mr. Leahy and Sen.
Charles Grassley (R., Iowa),
the top Democrat and Republi-
can on the Senate Judiciary
Committee, respectively,
agreed with their counterparts
in the House on a general
overhaul package meant to ad-
dress the developers’ use of
the distressed-area provision.
But they ran into resistance
from a set of developers andThey say they have offered
compromise overhaul plans, to
no avail.
Related has spent more
than $1.4 million on immigra-
tion-related lobbying since
January 2015, more than dou-
ble any other individual user
of the EB-5 program, up from
zero in previous years, accord-
ing to federal lobbying re-
cords.
Related executives have
poured money into federal po-
litical donations, largely tar-
geting congressional commit-
tees. Between January 2015
and November 2016, Related
Chairman Stephen Ross, Chief
Executive Jeff Blau and their
wives contributed a combined
total of $1.27 million to federal
candidates and political-action
committees, compared with a
total of $833,000 in the eight
years before 2015, according
to federal campaign-finance
reports.
A Related spokeswoman
said the program spurs large
and small projects throughout
the country, and with the help
of EB-5, “Hudson Yards is now
an economic engine pumping
over $150 million a month in
construction costs alone into
the economy and creating
thousands of jobs.”
“We continue to support a
robust expansion of the EB-5
program, greater transparency
and stronger oversight mea-
sures to ensure the program’s
integrity moving forward,” she
said.
Related has been a central
strategist with smaller real-es-
tate companies in pressing
lawmakers to block changes
sought by a bipartisan group,
making it by far the most ac-
tive individual player on the
issue.
“They’ve been effective at
getting the message out,” said
Nicholas Mastroianni II, chief
executive of US Immigration
Fund, a Related ally and one of
the largest companies thatothers in the industry—most
prominently Related. The de-
velopers, in turn, found sup-
port from a handful of key
senators including Sen. John
Cornyn (R., Texas) and Sen.
Charles Schumer (D., N.Y.),
who have been resistant to the
changes opposed by the devel-
opers.
Mr. Schumer has said the
government shouldn’t be try-
ing to direct development to
specific parts of cities, and a
spokesman said he believes
good projects in EB-5 “should
rise to the top based on how
many jobs they’ll create.”
A spokesman for Mr.
Cornyn pointed to the sena-
tor’s prior remarks that he
wants to make sure “money is
invested in urban and rural ar-
eas as well.”
The Related executives’ and
their wives’ recent political
donations have been largest
for committees tied to House
and Senate Republican lead-
ers, including $272,000 to the
National Republican Senatorial
Committee.Also aiding Related’s posi-
tion have been business trade
groups, the Chamber of Com-
merce and the Real Estate
Roundtable, which both have
taken positions nearly fully
aligned with Related, people
familiar with discussions said.
Mr. Blau is on the board of the
Roundtable and advocated for
the group to lobby on EB-5.
Roundtable Chief Executive
Jeff DeBoer said he would
have taken up the issue re-
gardless.
Related appears to have
benefited from its relationship
with Mr. Schumer, who in 2015
helped block changes Related
and other developers were
against.
Emails obtained via the
Freedom of Information Act
show that Mr. Schumer and
Mr. Ross were in direct con-
tact over EB-5 for Hudson
Yards, and Mr. Schumer urged
a division of the Department
of Homeland Security to expe-
dite Related’s EB-5 applica-
tions.
A staffer for Sen. Schumer,
Leon Fresco, in November
2013 asked the Homeland Se-
curity division for an update
on the expedited applications,
saying that “my boss will want
to call Ross and say the result
is coming.”
A month later, Mr. Fresco
checked back again.
“Anything new on this?
Now that the Dolphins won,
Steve Ross is getting antsy
and calling my boss again,” he
wrote. Mr. Ross owns the Mi-
ami Dolphins.
The next month, Mr. Fresco
asked again, saying “the boss
ran into Stephen Ross and he
asked about it.”
The spokesman for Mr.
Schumer said he “advocates
for all kinds of projects across
New York that create jobs.”
The applications were expe-
dited—a point Related used in
advertising to help raise funds
from investors in China.Immigrant Program Has a Big Defender
Developer fights to
preserve controversial
law that grants U.S.
residency to investors
Related Cos. and its chairman, Stephen Ross, have lobbied for the EB-5 immigration program.CHRIS GOODNEY/BLOOMBERG NEWSclined in 2016 from a very
strong year in 2015, falling
about 30%, Real Capital data
show, but alternative real-es-
tate investment held up better,
slipping 17%. And analysts say
demand remains high.
Just before Christmas, the
investment arm of French in-
surer AXA SA bought two dif-
ferent portfolios of health-care
properties in Germany and
Finland.
Health-care deals more
than doubled in 2016, com-
pared with 2015.
AXA Investment Managers
said it paid about €310 million
for 17 health-care properties
in Germany from U.S. private-
equity firm Blackstone LP. In a
separate deal, AXA bought 11
properties in Finland for €65
million.
Hideki Kurata, the head of
alternatives at AXA Invest-
ment Managers—Real Assets,
said an aging population is a
key demographic trend that
made the health-care invest-
ments attractive.
“We’re all getting older,”
Mr. Kurata said. Even if the
economy falters, secular
trends such as this “make al-
ternative assets more resil-
ient” than other real-estate
sectors, he said.Data centers—where com-
panies such as Alphabet Inc.’s
Google, Facebook Inc. and In-
ternational Business Ma-
chines Corp. house informa-
tion systems—had a big year
in Europe. Investment volume
of €5.6 billion was four times
greater than in 2015, Real Cap-
ital data show.
Student-housing investment
also has been strong. In the
U.K., the largest student-hous-
ing market in the region, £3.1
billion ($3.8 billion) of invest-
ment marked the second-big-
gest year on record, according
to property broker Cushman &
Wakefield.
The effect on foreign stu-
dents of Britain’s vote to leave
the European Union has in-
creased concerns among ana-
lysts, however. One out of five
U.K. college students is from
overseas, and these foreign
students make up 26% of U.K.
tuition fees, Cushman & Wake-
field said.
But the hunt for returns is
likely to continue to drive de-
mand, “especially as real-es-
tate investors increasingly
turn to alternative assets such
as student accommodation in
search of returns unavailable
elsewhere,” said Mike Mitch-
ell, who works on Cushman &Alt-property in Europe is on
the rise.
So-called alternative-prop-
erty sectors such as hotels,
student housing and data cen-
ters captured a record share of
Europe’s commercial real-es-
tate market in 2016, according
to data tracker Real Capital
Analytics.
The €35.1 billion ($37.1 bil-
lion) of deals in 2016 made up
15% of the total value of all
commercial property transac-
tions, compared with 12% in
2015, Real Capital said.
Commercial real-estate in-
vestment has surged in recent
years in part because ultralow
interest rates have sent inves-
tors hunting for returns. And
after years of strong demand
pushing up prices in tradi-
tional commercial-property
sectors—offices, retail and
warehouses—investors in-
creasingly have turned to al-
ternatives.
Alternative property is
yielding about 6.5%, compared
with 5.9% for offices, the most
actively traded real-estate sec-
tor in Europe, according to
Real Capital.
Commercial-property in-
vestment in Europe overall de-
BYARTPATNAUDE
Europe Investors Embrace
‘Alternative’ Real Estate
Alternative property like hotels and data centers are yielding more than offices. Here, a London hotel.CHRIS RATCLIFFE/BLOOMBERG NEWSvelopment, has used the tech-
nique to build a majority of its
European properties, the com-
pany said.
In the U.S., however, modu-
lar construction is less com-
mon, and is largely limited to
residential projects. New
York’s fledgling modular con-
struction industry is hoping
the citizenM project will pro-
vide an example of the tech-
nology’s advantages for hotel
developers building in high-
cost urban settings.
The method isn’t necessar-
ily cheaper, but it allows for
quicker construction, meaning
developers can open projects
sooner, industry executives
said.
“So much centers on how
quickly you get the hotel full,”
said Roger Krulak, chief execu-tive of Brooklyn-based Full
Stack Modular LLC, which last
year bought the core assets of
the modular manufacturing
company once owned by devel-
oper Forest City Ratner Cos.
CitizenM in 2015 chose the
Polish company Polcom Modu-
lar, which has worked with cit-
izenM in the past and has
built numerous modular proj-
ects, to manufacture the units
for the Bowery hotel. CitizenM
co-owns the hotel with Brack
Capital Real Estate.
“We are 100% open to ex-
ploring new relationships with
U.S. manufacturers,” said Er-
nest Lee, citizenM’s vice presi-
dent of development and in-
vestments in North America.
The modular approach
lends itself to hotel developers
aiming to replicate standarddesigns, especially in the af-
fordable-boutique category
with compact rooms and an
emphasis on stylish amenities
and common spaces.
Developers of the $110 mil-
lion Pod Brooklyn hotel in the
Williamsburg neighborhood
also opted for modular units
from Polcom Modular. The
249-room property, which is
expected to open in late
spring, was about 15% cheaper
to develop using modules than
the typical on-site construc-
tion, said Michael Barry, co-
owner of Ironstate Develop-
ment Co., which joined with
CB Developers and SK Devel-
opment on the project.
Like other modular proj-
ects, citizenM’s Bowery proj-
ect combines traditional and
modular methods.Typical on-site construction
was used to erect a three-
story podium and a concrete
structure housing elevator
shafts, according to the
Rinaldi Group, the project’s
construction manager. Rinaldi
is working with a team of
about 10 workers from Polcom
Modular to install 210 modules
built in Poland.
The modular installation,
which began in late November,
is expected to take about three
to four months, compared with
the six to nine months it would
have taken to build that por-
tion using traditional methods,
said Anthony Rinaldi, chief ex-
ecutive of the Rinaldi Group.
The number of truck deliv-
eries to the site will be cut by
about 1,200 compared with a
conventional construction site,and the crane will be on site
for about five months, com-
pared with a year or longer
normally, Mr. Rinaldi said.
“That is the beauty of mod-
ular construction,” said Mr.
Rinaldi. “It really minimizes
disruption to the neighbor-
hood, to the community, to the
traffic flow.”
In New York City, the tech-
nology is suited for affordable-
housing projects and smaller
boutique hotels, potentially in-
creasing the use of local union
labor in two sectors where its
share of the workforce has
been historically low, said
Gary LaBarbera, the president
of the Building and Construc-
tion Trades Council of Greater
New York. The unions have an
agreement with Full Stack
Modular.A Dutch company has built
a splashy high-rise hotel in Po-
land and shipped it in 210
pieces to New York.
The 20-story, 300-room
project at 185 Bowery by hotel
developer and operator citi-
zenM is the biggest modular-
construction hotel project ever
in New York.
By stacking together fac-
tory-made, sealed units con-
taining completely finished
hotel rooms, citizenM expects
to save time, improve quality
control and cut down on traf-
fic congestion and other con-
struction nuisances.
In Europe, permanent mod-
ular construction is wide-
spread. CitizenM, which has
nine open hotels and 14 in de-
BYKEIKOMORRIS
New Hotels Are Going Up Piece by Modular Piece
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