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Pension funds pull back on commercial real estate

Borrowing rates rise pose headwinds after investments rose in first half of 2022

Commercial Real Estate, Private Equity, Office Market
(Photo Illustration by The Real Deal with Getty)

Pension funds are pulling back on their commercial real estate binge as borrowing rates rise.

The retirement funds are cooling on the sector and limiting new investments in the sector, the Wall Street Journal reported. The shift comes after they poured money into commercial real estate during the first half of the year, capitalizing on a market trying to recover from the wreckage of the pandemic.

Retirement funds made $32.6 billion in commitments to commercial properties in the first half of the year, according to Ferguson Partners, up 40 percent year-over-year. It’s too soon to put a number on what the second half will bring, but activity in the sector is highly influenced by interest rates, which have been subject to recent hikes in the Federal Reserve’s moves to tamp down inflation.

Last year, a record $80 billion was raised in the fourth quarter from pension funds and institutional investors, according to Preqin. Market participants told the Journal they expect fundraising to be much lower this year.

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“We have this unwanted inflation issue,” Ferguson’s Scott McIntosh told the Journal. “There also are issues around the cost of labor and supply-chain disruptions that have made building a lot more expensive.”

Pension funds previously pulled back from the office market, no longer interested in dealing with a vacancy problem that shows no signs of abating any time soon. Three years ago, private real estate funds held 34 percent of their investments in offices, according to an index from the National Council of Real Estate Investment Fiduciaries. As of August, that number had dropped to 23 percent.

These funds instead appeared to be embracing residential and industrial plays. But the larger commercial real estate sector has become less appealing in recent weeks as the Fed appears poised to keep hiking rates.

With fundraising slowing, commercial property sales are also falling. In the third quarter, investors purchased $172.2 billion of commercial property, according to MSCI. That’s down 21 percent year-over-year.

— Holden Walter-Warner

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Commercial Real EstateHotel MarketIndustrial Real EstateOffice MarketPrivate Equity