The Real Deal New York

Public pension funds looking for more exposure to high-risk real estate

Allocations to opportunistic investments on the rise as funds aim to fill commitment gaps
November 26, 2018 11:00AM

Terminal Stores at 271 11th Avenue and California State Teachers’ Retirement System CEO Jack Ehnes (Credit: Curbed NY and CalSTRS)

U.S. public pension funds are pushing for more exposure to riskier, opportunistic real estate investments to help close their funding gaps.

American public plans have increased their allocations to opportunistic investments by a measure of six times between 2006 and 2016, according to an analysis by CEM Benchmarking cited in the Wall Street Journal. During that same time, exposure to core properties has remained flat.

Pension funds are moving toward riskier deals as rising values have made it harder to find attractive investments.

“Five years ago, you really could have thrown darts and had a pretty successful portfolio,” said Shawn Quinn of Wilshire Private Markets, which advises institutional clients.

The California State Teachers’ Retirement System has a target of putting 20 percent of its real estate portfolio, or about $5.7 billion, into opportunistic real estate investments. A spokesperson for the fund said it currently doesn’t meet that target.

An official at CalSTRS said the fund looks to earn 13 percent to 30 percent on opportunistic deals, compared to somewhere between 6 percent and 9 percent on core investments. The fund recently teamed up with L&L Holding Co. and Normandy Real Estate Partners to buy the Terminal Stores warehouse for $900 million.

All told, public and private pension funds had about $135 billion invested in opportunistic vehicles as of 2016, according to CEM Benchmarking research, which was sponsored by Nareit.

Pension funds took huge losses on their real estate investments during the financial crisis, but they’re now under increasing pressure to fill funding gaps. Governments have unfunded commitments estimated by the Boston College Center for Retirement Research totaling $1.6 trillion, while Moody’s Investor Services puts the figure at $4 trillion. [WSJ] – Rich Bockmann