Government pension schemes have been hit by the commercial real estate collapse, and many fear the bleeding is far from over.
Government pension schemes have been hit by the commercial real estate collapse, and many fear the bleeding is far from over.
Canada's National Pension Fund said in May it was selling its stakes in office buildings in Manhattan and San Francisco for $225 million less than it bought them for. In April, California's public employee pension fund said it had sold a Sacramento property it had been developing for nearly two decades. In March, a consultant warned California's teachers' pension fund that its office building holdings would continue to eat into its profits even after real estate prices fall 9% in 2023.
Hello! You're reading a premium article! Subscribe now to continue reading. Subscribe now Already a subscriber? Log in
Premium Benefits
35+ Premium Articles Every Day
Specially curated newsletters every day
Access 15+ print articles every day
Exclusive webinars with expert journalists
E-papers, archives, and select articles from The Wall Street Journal and The Economist
Access to exclusive subscriber specials: infographics and podcasts
35+ Well-Researched Unlocks
Daily Premium Articles
Access to global insights
Over 100 exclusive articles
International Publications
Exclusive newsletter for 5+ subscribers
Specially curated by experts
Free access to e-paper and
WhatsApp Updates
Canada's National Pension Fund said in May it was selling its stakes in office buildings in Manhattan and San Francisco for $225 million less than it bought them for. In April, California's public employee pension fund said it had sold a Sacramento property it had been developing for nearly two decades. In March, a consultant warned California's teachers' pension fund that its office building holdings would continue to eat into its profits even after real estate prices fall 9% in 2023.
The moves highlight a broader, slower downturn in commercial real estate. Such investments don't generally trade on the public market like stocks, so there are no agreed-upon prices. When markets fluctuate, it can take managers months or even years to adjust the value of their holdings.
Two years after interest rates began rising and four years after the coronavirus pandemic, the impact of these events is being felt from U.S. banks, which hold trillions of dollars in real estate loans and investments, to the retirement savings of teachers and firefighters.
Canadian pension funds, whose fiscal year ended in March, said they had earned less than 1% annually in real estate over the past five years, while a large U.S. public pension fund reported its first annual real estate loss since the COVID-19 pandemic, with returns of minus 6% for the 12 months ended Dec. 31, according to Wilshire Trust Universe Comparison Services.
Wilshire managing director Sean Quinn said many pension fund managers were concerned the storm was not over yet.
“People are cutting back as they try to understand what's in their portfolios,” Quinn said. “Institutional investors aren't sure if we've hit bottom.”
Office space will continue to weigh on revenues in the California Teachers' $333 billion real estate portfolio, Taylor Mammen of RCLCO Fund Advisors said at a board meeting in March. Traditional office space makes up about 18% of the California Teachers' roughly $48 billion real estate holdings.
RCLCO attributed Calstrs' 9% property loss in the 12 months to December mainly to falling property values due to rising interest rates.Mammen said the reset would finally give pension managers attractive property investment options outside of offices.
“Most of the industry, and Calstrs included, have spent a lot of time over the last 12 months on the defensive,” he said.
Pension funds, like sovereign wealth funds, university endowments and family offices, typically buy real estate directly or through private fund managers. Some analysts and pension advisers suspect that those managers themselves are delaying reporting losses. Shares of publicly traded real estate investment trusts have generally fallen more sharply than their private peers.
But pension funds have reported even less of a burden so far than private managers. Privately managed funds tracked by the National Association of Real Estate Investment Trusts have reported returns of minus 12% in 2023, double the losses posted by pension funds. The funds tracked hold a mix of apartment, industrial, retail and office properties. Pension authorities often consider private fund valuations with a one-quarter lag because they take longer to assess than stocks and bonds.
The board that oversees Canada's $461 billion national pension system is shifting the focus of new real estate investments from actual buildings to infrastructure such as highways and energy, according to its annual report released in May.
The Canada Pension Plan Investment Board said in a filing that it sold its stake in a downtown San Francisco office building that once housed Uber for $44 million. The board bought the stake for $219 million in 2014. The fund also said it bought a stake in a building at 10 East 53rd Street in Manhattan for $57 million in 2012 and signed a deal to sell it for $7 million in March.
Meanwhile, the $493 billion California Public Employees' Retirement System owns a nearby Manhattan office building, the AXA Equitable Center at 787 Seventh Ave. A February analysis by KBRA estimated the building's value at $917 million, 12% below what CalPERS estimated when it bought it in 2016.
Many properties have been sitting in pension fund portfolios for more than a decade. In the years leading up to the coronavirus pandemic, U.S. retirement funds struggled to make up for a cash gap during an era of low interest rates and turned to riskier real estate deals.
Other real estate purchases were made before the 2008-09 financial crisis, when many pensions were flush and pension boards were eager to back local economic development projects. As of June 2023, CalPERS had 41% of its $69 billion real assets portfolio invested in California, a larger share than any other type of investment.
One property in particular has been a long-running headache: In the early 2000s, CalPERS began planning to build twin 53-story apartment towers on a block of land in its Sacramento headquarters, but financing fell through in 2007.
A decade later, CalPERS' board approved new plans for the site: a complex of office, apartment and retail buildings that would have been Sacramento's tallest tower. But they couldn't find enough office tenants, and a new investment chief withdrew the plans just before the pandemic hit.
CalPERS' total investment in the land is $87 million, a spokesman said. Then in April, the pension fund announced it had sold the land to the Shingle Springs Band of Miwok Indians, a federally recognized tribe in Placerville, California, for $17 million. Shingle Springs Band Chairwoman Regina Cuellar said in a press release that the land is part of the group's ancestral homeland.
CalPERS said it has shifted its real estate strategy from speculative undeveloped properties to more established projects that generate stable cash returns.
Write to Heather Gillers at heather.gillers@wsj.com
Topics that might interest you Check out all the industry news, banking news and updates on Live Mint. Download the Mint News app for daily market updates.
Source link