Real estate eyes turn to Liu

<i>Incoming comptroller’s plans to pursue conservative investments have some in industry worried</i>

John Liu
As John Liu measures the drapes for his new offices at 1 Centre Street in Lower Manhattan, there is quiet consternation within the real estate community that a key source of financing could be in jeopardy when Liu takes over as city comptroller in January.

The two-term City Council member is all but assured of victory in the general election against his Republican opponent early this month.

Following his win in the Democratic primary runoff last month, Liu suggested that he would impose a new investment philosophy for the $86 billion in city pension-fund assets he will oversee.

In an interview with Bloomberg News, Liu said his philosophy would differ from that of the current comptroller, William Thompson, who increased investments in commercial and residential real estate during his tenure.

As of June 30, the total amount invested in real estate and securities was about $7.1 billion, or 8 percent of the total sum invested.

Liu outlined a conservative investment strategy that would rely more on “traditional instruments” rather than “the more aggressive esoteric financial instruments” — Bloomberg News put stocks and bonds in the “traditional” category and investments such as private equity, real estate and hedge funds in the “esoteric” category — “that in some ways,” Liu noted, “got us into a deep financial crisis.”

Yet how that pledge would ultimately translate into real-world investments remains vague.

Calls to Liu’s office were not returned.

His language, however, seems to have struck a chord. Steven Spinola, the president of the Real Estate Board of New York, acknowledged that Liu’s comments were disconcerting. Spinola, though, chalked it up to typical rhetoric that can occur during a close campaign.

“There is a lot of rhetoric in campaigns, so we need to give the comptroller time to go into his office and hear from his professional staff, and they will give him an evaluation of where real estate has performed, and where it has not performed, versus other investments,” Spinola said.

“It is true that Thompson made an effort to increase real estate investments, which we were happy about, but it’s complicated,” he continued. “In the end we think the new comptroller will look at real estate as a reasonable long-term investment.”

When he ultimately does take over, Liu will be wading into a prickly and ongoing debate over the level of aggressiveness that fund managers should pursue when making investment decisions with the city’s pension-fund assets. That debate has particular resonance now with the city’s real estate community, because of the depressed state of New York’s commercial real estate market.

Proponents argue that credit is badly needed and that there may be bargains out there to be had.

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Avi Schick, the former president of the Empire State Development Corporation, argued earlier this year in a Daily News editorial that the state and city comptrollers’ offices should allocate $2 billion of the $200 billion in pension assets they manage to create a fund to finance commercial real estate.

“If financing is the oxygen of the real estate market, then right now it is choking,” Schick wrote. “That is bad news, because a New York defined by fenced-in building lots rather than gleaming towers will not attract business or people. And federal action alone will not spur banks to make real estate loans.”

The new comptroller hinted that he may steer more funds towards socially targeted investments. Bloomberg News reported that at Liu’s victory celebration he pledged to invest in minority- and women-owned businesses and in projects “creating jobs and affordable housing.”

The strategy has critics. Nicole Gelinas, a senior fellow at the Manhattan Institute, a conservative think tank, said, “There is too much room for political favors” in socially targeted investing.

According to the city comptroller’s office, as of June 30, $4.5 billion was invested in 150 private equity funds, $1.7 billion in 35 real estate funds, and $847 million with three REIT managers — San Francisco-based Adelante, Morgan Stanley and Chicago-based Security Capital.

Of the $1.7 billion, $945 million has been invested in core/core-plus strategies, defined as traditional domestic real estate investment positions in apartment, office, industrial and retail space. The remaining $778 million is invested in noncore strategies, which the comptroller’s office describes as distressed debt and properties, land plays and other specialized investments.

For now, at least, it’s difficult to gauge the precise depth of concern in the real estate community. Tishman Speyer is the only major firm that has entered into a joint venture with the city’s pension fund. They declined to comment.

Also, Liu, the first Asian-American poised to hold a citywide office, will not be working in a vacuum. Each of the five funds has its own trustees appointed by city officials (including the comptroller) and the major municipal unions — although it’s the comptroller’s office that has the most sway over which investment managers get hired.

If campaign contributions are any indication, then the real estate community may have reason to fret. During the primary, $307,325 of the $2.9 million Liu raised was in real estate donations — the lowest total of all the Democratic front-runners.

But to Spinola, Liu’s choice is clear.

“It’s a bad time because money is difficult to obtain for developers and businesses simply because of the economic climate, so to make it more difficult is a problem,” he said. “They are going to win some and lose some, but I don’t think you should take [real estate] off the table as an option.”