The Real Deal Miami

Pension funds avoid trophy properties as prices skyrocket

August 17, 2011 12:36PM

Some of the largest pension funds in the U.S. are beginning to retreat from trophy properties in the most expensive real estate markets after increased demand for a limited number of buildings considered low-risk boosted prices of big-city skyscrapers to record levels, the Wall Street Journal reported. Funds are worried that a new bubble may be inflating.

“Major coastal markets have seen significant price appreciation that has not coincided” with increases in either occupancy or rental rates, said Mike Dire, director of real estate investments for the California State Teachers’ Retirement System. “We believe the reason for this pricing increase” for the buildings in these markets “is a significant demand for core assets from private and public buyers along with overseas investors.”

An index of commercial property values by Green Street Advisors, tilted toward high-end and trophy buildings, has jumped more than 45 percent since 2009 and is only 10 percent below its all-time highs, the Journal said.

The California teachers’ fund and the Texas Municipal Retirement System will both be avoiding core assets in new investments, and Hermes Real Estate Investment Managers, a $9.5 billion British pension fund set to make its first U.S. real estate investment in coming months, has said it will be avoiding Manhattan, Washington and other major cities.

Earlier this week, it was reported that investors might have the completely opposite reaction to market uncertainty. Commercial property buyers who had shifted their focus from prime coastal city properties such as in New York and San Francisco to secondary markets like Las Vegas, Dallas and Minneapolis, may rethink their strategies as a result of recent financial market volatility, Bloomberg News reported. [WSJ]