News that public state pension funds are $1 trillion short in funding expected retiree benefits should be rattling everyone and come as no surprise. As they increased real estate allocation targets to 10% or more of their total asset portfolios, many state funds invested with wild abandon in real estate opportunity funds and private equity accounts in vain attempts to boost returns and fill burgeoning gaps-only exacerbating their liability problem in the ongoing crash.
In raising real estate allocations, public plan sponsors and their consultants rationally had talked up the benefits of investing in real estate for income plus returns, which matched nicely with future retiree payouts. But instead of concentrating in core real estate, they ramped up investments in riskier value-add, opportunistic, and global funds with a keen eye on bigger paybacks. And these higher risk strategies were largely based on using more leverage to boost returns, not part of the traditional plan sponsor conservative playbook.
Of course, real estate is just a small part of the public pension fund crisis. Essentially, the system is untenable. Public employees can´t work for just 20 or 25 years and retire in their 40s on full pensions without eventually bankrupting state and local governments. Well eventually has arrived.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
