Imagine, if you can, taking a trip back in time to check in on big government pension funds in 2018, when they considered investing heavily in commercial real estate a “safe” bet during a rough year in the stock market. You’re not new to time travel though, first, let’s take a look at where you’ve been before. In 2023 Your Survival Guy wrote:
Five years is a long time when thinking about where we’ve been since 2018. But over a lifetime, time flies. Because in our minds, we’re always about 30 or so, even when our bodies beg to differ. With all our living, we don’t know what next year will bring. Yes, I know; there are plenty of predictions out there. Here’s a reminder of how those making them are “often wrong, but never in doubt.”
Roll the footage (WSJ article Nov. 2018):
U.S. public pension funds are taking on more real estate, and at times some of the riskiest types of property investments, as they try to close their funding gaps.
American public plans with more than 20,000 members had an average 7% of their assets in real-estate investments at the end of 2017, according to a Wall Street Journal analysis of Boston College’s Public Plans Data, which contains the most recent numbers available. That is up from 4% in 2006, representing more than $120 billion in additional pension money flowing into real estate.
Some of this increase is due to the construction of new properties designed to be sold later for a profit. These so-called opportunistic investments by pensions grew nearly sixfold between 2006 and 2016 even as allocations to “core” existing properties remained flat, according to an analysis by CEM Benchmarking.
As I wrote to you in 2020:
One pension consultant advised an increase in “core” (read commercial) real estate, probably because it was going up in value, and more than likely, assets that are going up are an easy sell to the pension board.
Imagine the 30-foot conference table, the business suits, the presentations, the hubris, and you get the picture.
Pension boards are all about protecting jobs: their own, that is.
If some fancy consulting team advises real estate and then the pension fund follows their advice, then there’s no one to blame. Perfect.
Here’s what our billion-dollar soothsayer said:
“In a core property, you have a known source of income on day one and, depending on the lease structure, you have a pretty good understanding of future rents. Versus something you’re going to build today, which you’re not even sure if you’re going to have a tenant.”
In 2018, big pension funds were loading up on commercial real estate as a “safe” bet. Now travel “back to the future” to 2024, and read Heather Gillers’s latest report in The Wall Street Journal on the commercial property meltdown clobbering pension funds. She writes:
Government pension plans are getting hit by the commercial real-estate meltdown and many fear the bleeding is far from over.
Canada’s national pension plan said in May that it is selling stakes in Manhattan and San Francisco office towers for $225 million less than it paid for them. In April, California’s government worker pension fund said it had unloaded a Sacramento property it had been trying to develop for almost two decades. In March, consultants warned California’s teacher pension that office holdings would continue to drag down returns, even after a 9% real estate loss in 2023.
The moves offer a new glimpse into the widespread and slow-moving commercial real-estate slump. Because those investments generally don’t trade on public markets like stocks, there isn’t an agreed-upon price. When the market shifts, it can take months or years for managers to adjust the value of their holdings.
Now, two years after rates started rising and four years after Covid-19 hit, the impact of those events is spreading from U.S. banks with trillions of dollars of property loans and investments on their books to the retirement savings of teachers and firefighters.
Canada’s pension plan, which ended its fiscal year in March, said real-estate returns over the past five years have amounted to less than 1% annually. Large U.S. public pension funds, meanwhile, reported their first annual real-estate loss since the Covid-19 pandemic, returning negative 6% for the 12 months ended Dec. 31, according to Wilshire Trust Universe Comparison Service.
Many pension-fund managers fear the storm isn’t over, said Wilshire managing director Shawn Quinn.
“Folks are allocating less dollars, trying to understand what they have in their portfolio,” Quinn said. “Institutional investors are not quite sure if we’ve hit the bottom yet.”
Offices will continue to drag down returns in the $333 billion California State Teachers’ Retirement System’s real-estate portfolio, Taylor Mammen of RCLCO Fund Advisors told board members at a March meeting. Traditional office space makes up about 18% of Calstrs’s roughly $48 billion in property holdings.
RCLCO attributed Calstrs’s 9% real-estate loss for the 12 months ended in December in large part to higher interest rates driving down property values. Mammen said that reset could eventually leave pension managers with some attractive real-estate investment options, outside of offices.
“Most of the industry and really Calstrs included have spent much more time over the past 12 months playing defense,” he said.
Pensions, like sovereign-wealth funds, university endowments and family offices, generally either buy properties outright or invest through private fund managers. Some analysts and pension advisers suspect those managers are themselves slow to report losses. Share prices of publicly traded real-estate investment trusts have generally fallen much further than private marks.
Action Line: When you want to talk about time, I’m here. Let’s talk about the time value of money and what it takes to begin a lifetime of compounding that money into wealth you can use in retirement. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.
