Pension fund capital flows have been a mainstay of the commercial real estate industry for more than 30 years—plan sponsors have been the primary targets of real estate managers and more recently private equity investors, looking to advance their assets under management and related fees. By some counts there are more than 300 firms currently competing for institutional capital—many are simultaneously trying to survive the aftershocks of the recent market downslide and some merely stay in business nursing assets with relatively dismal prospects for any near-term recovery. When the shakeout ends in coming years, there may be room for only half as many advisors—ten to 20 major brand players who concentrate assets in large core funds and more opportunistic private equity accounts as well as a host of manager-operators which run money.
The middleman manager shrinkage has much to do with the end of the transaction bizarre and the drying up of debt pools. Like sub-prime home buyers, many of the smaller advisors wouldn’t have been able to acquire assets without cheap leverage and without it they are out of business. The slow pace of recovery also doesn’t make for a compelling return story for pension funds desperately looking for big pops to meet increasing retiree liabilities.
But the real estate pension management business faces even greater challenges—the looming demise of traditional defined benefit plans. The whole post-World War II pension model looks as unsustainable as the government’s Social Security and Medicare programs. They all worked great when you had many more people who were working than a much smaller group of current beneficiaries. Companies and local governments could keep up by putting aside money and investing it to meet reasonable liabilities But now that the baby boomer generation heads into retirement, the whole pension system slowly becomes overwhelmed and untenable.
We’ve talked before about how corporations simply do a bob-and-weave with their employees by abrogating their defined benefit or corporate contribution plans. In turn, they talk up the benefits of 401Ks—“you now have the ability to control your own investments” and we now only have to contribute a pittance without any responsibility for future payouts. Of course, state and local governments will have no choice, but to gradually transform public employee pensions into similar 401K plans. It’s started with new hires, but it must eventually extend to all workers no matter their seniority, because tax coffers cannot possibly cover the shortfalls and pension advisors cannot possibly ramp up returns to necessary levels without taking inordinate risk, which typically ends up backfiring into greater shortfalls.
The 401K format requires liquidity to manage constant shifts in allocations from participants—stock and bond funds are well suited, but lumpy private equity real estate is not. Big financial firms have struggled with various concepts to meet the 401K market—all with limited success. The loads on these funds can be prohibitive too especially compared to simply investing in REIT stocks or stock and bond mutual funds.
The real estate pension fund business won’t disappear any time soon, but it will continue to shrink… fast… (And if you are lucky enough to have a pension now, don’t count on having it when you are ready to retire. In the meantime, good luck with managing your own investments—in the new world order, it’s basically all left up to you.)
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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.
