Michael Stoler — Pension fund winners turn into losers

Imagine, just a few years ago, public pension funds were among the major beneficiaries of the record sales of commercial and residential real estate. In 2007, some of the nation’s largest pension funds amassed record profits for the sale of assets in New York City. But time changes all things, including record profits. In that vein, I’ve decided to examine some of the profits, and possible losses, from these investments.

The New York City Employees Retirement System (NYCERS) and the New York State Common Retirement System (in joint venture, and as an investor with real estate funds), invested in New York City real estate. NYCERS has invested in real estate projects through joint ventures with real estate owners, developers and fund managers. These include Boston Properties, to acquire and develop office properties in Boston, New York, Washington, D.C., and San Francisco; AREA Property Partners (formerly Apollo Real Estate Advisors), to develop and rehab properties throughout New York State; Taconic Investment Partners, to acquire office properties in New York City; General Growth Properties (the nation’s second-largest U.S. shopping mall owner, who filed the largest real estate bankruptcy in the U.S.) to acquire and develop regional malls; and Kimco, to acquire neighborhood shopping centers.

In March 2004, NYCERS, along with Tishman Speyer Properties and other partners, purchased the leasehold interest in the 34-story, 635,000-square-foot office tower located at 885 Third Avenue for $247.5 million. In April 2005, it was announced that TMW Property Fund, whose parent is Prudential Real Estate Investors, paid $164 million for a 49 percent ownership interest in the building. In July 2007, the joint venture sold the property for $648.5 million to an investment group led by Tao-Maofim, a U.S. joint venture of Tao Tsout LTD and Financial Levers.

Significant profit was also realized by NYCERS and the New York City Teachers Retirement in June 2007. In December 2004, the two pension funds — in a joint venture with Tishman Speyer Properties — paid approximately $175 million for the former New York Times Building on West 43rd Street between Seventh and Eighth avenues. Fast forward to June 2007 when the joint venture sold the property to Africa Israel Investments for $525 million, recognizing a profit of $350 million, or 300 percent.

The New York State Common Retirement System has been the beneficiary of the rising real estate market. In 2002, a joint venture of Taconic Investment Partners and the State Common Retirement Fund acquired the 33-story, 350,000-square-foot office tower at 450 Park Avenue, at the corner of East 57th Street. It paid $158 million to the estate of Peter Sharp, who built the property in 1972. In October 2007, Somerset Partners paid $509 million, or about $1,566 per square foot, for the tower, at that time the most money paid for an American office tower on a per-square-foot basis. The Fund had previously reaped excellent profits on the sale of another office building, a joint venture with Taconic. In 1999, the Fund purchased a 90 percent interest in the 2.9 million-square-foot office building at 111 Eighth Avenue, which formerly housed the Port Authority, for $153.6 million. In February 2004, the joint venture sold a 75 percent interest to Atlanta-based Jamestown Group for $581.3 million.

Those were some of the returns earned by our local pension funds in the go-go years of 2004 to 2007. Unfortunately, 2009 is a time when many of the nation’s leading pension funds have lost money in the stock market and commercial and residential real estate.

In 2007, investors from around the world would have probably paid more than $3.5 billion for the Met Life Building at 200 Park Avenue. The New York City Employees Retirement System and its joint venture partner, Tishman Speyer Properties, might have doubled their money in less than two years for their purchase of the 3.1 million-square-foot building, which they obtained in July 2005 for $1.72 billion. But without mortgage financing in place, coupled with the credit crisis, industry leaders might value the building for the same price as the time of purchase.

The California State Retirement System has been an active purchaser and owner of New York City real estate. In July, the country’s two biggest pension funds, the California Public Employees’ Retirement System (CalPERS) lost $56.2 billion for the 12 months ended June 30, 2008, and the California State Teachers’ Retirement Systems (CalSTRS) lost $43.4 billion for the fiscal year. CalPERS suffered severe losses across its investment portfolio, which was hardest hit by a 43 percent decline in its real estate values.

More recently, the talk of the town is the loss in value of Stuyvesant Town and Peter Cooper Village. It was only Oct. 16, 2006, when Tishman Speyer Properties and its partner, BlackRock Investments, signed the largest residential transaction deal in U.S. history, agreeing to pay $5.4 billion for the 110-building apartment complex. In November 2006, CalPERS committed $500 million in equity for the purchase of the complex. In May 2007, CalSTRS committed to a $100 million investment in the project. Last month, the pension fund said, “The investment is now valued at ‘0’ as [its] impairment is considered to be a permanent condition.” At the same time, the Florida State Pension board announced that it had written off its entire $266 million investment in the complex.

CalPERS was no stranger to investments in New York City commercial real estate.

In March 2005, CalPERS, in a joint venture with MacFarlane Partners, acquired a 49.5 percent equity interest in the retail and parking garage component of the Time Warner Center.

Later in the year, CalPERS and Black Rock Realty paid $97 million to Rudin Management for the 238-unit rental apartment building at 30 Park Avenue, and went on to acquire the Wellington at 200 East 62nd Street for $173 million.

Since 2004, CalSTRS has been investment partners with Silverstein Properties with its purchase in the office building at 120 Broadway. In October 2006, the joint venture paid $418 million for the 35-story, 611,000-square-foot office building at 575 Lexington Avenue. In December 2006, the joint venture paid $170 million for the former corporate headquarters of Moody’s Corp. at 99 Church Street. The last purchase of the joint venture took place in December 2007, when it paid more than $1 billion for the 47-story, 1 million-square-foot office tower at 1177 Sixth Avenue.

Timing is everything in business and in the ownership of commercial and residential real estate. These pension funds were the beneficiaries of the record-high sales of the early 21st century. Today, it looks like they are the recipients of the losses.

Few people expected New York City to rebound after the record declines in values in the 1990s or after the tragic events of Sept. 11. Patience, hard work and the ability to maintain the properties over the next few years will tell the story whether these investments can again prove beneficial.