Pension Funds Unload Office Buildings, Target High-Demand Assets

Pension funds are still bullish on commercial real estate, but many are pulling back on investments from the underperforming office sector and shifting their resources to in-demand CRE assets including industrial, housing, life science and infrastructure.

The California State Teachers’ Retirement System (CalSTRS) has been selling office buildings in its $312B investment portfolio and adding industrial, residential and infrastructure assets in 2022.

Last month, CalSTRS acquired a newly built 1.2M SF warehouse in Mesa, AZ for $167M from Scottsdale-based Marwest Enterprises. The facility, known as Elliot 202, has been pre-leased by Amazon.

“No one can quite figure out the office market because office usage is just all over the map and down,” said Christopher Ailman, investment chief of CalSTRS, at an August board meeting of the nation’s second-largest pension fund.

Ailman told board members that CalSTRS is adding investments in industrial, residential and infrastructure properties. In its most recent biannual report, CalSTRS projected that “industrial real estate will continue to outperform other asset classes through 2022.”

According to a report in the Wall Street Journal, CalSTRS also has invested in NYC’s LaGuardia Airport—which recently underwent a $4B renovation—and the fund is exploring an investment at John F. Kennedy International Airport.

Oxford Properties, the real-estate arm of the $90B Ontario Municipal Employees Retirement System, is reducing its office assets to 20% of its portfolio, more than half of the 44% it made up six years ago.

In the past 12 months, Oxford has sold office properties in Manhattan, Toronto and Boston worth a total of nearly $2.7B and redirected the proceeds to the acquisition of warehouses and life science research facilities.

S&P Global surveyed recent meeting minutes for the 40 largest US public pension funds and found that plans to increase real estate holdings were the most commonly discussed strategy, with fund managers noting that most asset classes are outperforming stocks and bonds.

In Q2 2022, the National Council of Real Estate Investment Fiduciaries index returned 4.77%, while returns for the S&P 500 languished at minus 16.1% and the Bloomberg US Aggregate Bond Index also was in negative territory, at minus 4.69%.

According to an analysis of national council data by the Teacher Retirement System of Texas, the spread in returns between the highest- and lowest-performing real estate asset classes is at a 20-year high, with industrial properties yielding returns of more than 6% in the second quarter while returns for office assets were 0.69%.

At its most recent board meeting, the Texas teachers’ pension fund reported that it has been investing in the red-hot film production sector, acquiring soundstages and studio space.