Commercial Property Meltdown Clobbers Pension Funds

Government retirement funds are selling property at a loss as the slump spreads.

Jordan B. & Han-Gwon Lung
June 03, 2024

Good morning. Government retirement funds are selling property at a loss as the slump spreads, with significant implications for future returns and portfolio management strategies.

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PROPERTY REPORT

Commercial Property Meltdown Clobbers Pension Funds

Before the Covid-19 pandemic, U.S. retirement funds took on riskier real estate deals to address funding shortfalls during low rates. Now, they are facing significant losses due to the ongoing commercial real estate slump.

Major losses: In recent months, several government pension plans have liquidated properties at significant losses. Canada’s national pension plan recently sold stakes in Manhattan and San Francisco office towers for $225 million less than their purchase price. Meanwhile, California’s government worker pension fund offloaded a Sacramento property it struggled to develop for nearly two decades. Two years after rates rose and four years post-Covid, the fallout is now hitting teachers’ and firefighters’ retirement savings.

Impact on returns: The downturn is significantly impacting public pension funds. Canada’s pension plan reported less than 1% annual real estate returns over the past five years. In the U.S., large public pension funds recorded their first annual real estate loss since the pandemic, with a negative 6% return for the year ending December 31, 2023. Specifically, California’s teacher pension fund experienced a 9% real estate loss in 2023.

What about private funds? Pensions, like sovereign-wealth funds and university endowments, typically buy properties or invest through private fund managers. And they, too, are feeling the pain. In 2023, privately managed real estate funds tracked by the National Council of Real Estate Investment Fiduciaries reported a negative 12% return, double the loss reported by public pension funds.

Zoom in: Experts like Shawn Quinn from Wilshire Trust Universe Comparison Service suggest that the worst might not be over yet. Many pension fund managers are reducing allocations and reevaluating their portfolios. Offices are expected to continue dragging down returns in the $333B California State Teachers’ Retirement System (Calstrs), whose real estate portfolio includes roughly $8.6 billion in traditional office space.

➥ THE TAKEAWAY

Big picture: Pension funds, weighed down by risky real estate deals made during low-rate periods and before the 2008-09 financial crisis, are now shifting focus. New opportunities outside the office sector may emerge as they move from traditional real estate to infrastructure investments like highways and energy not-yet-developed that provide a stable cash yield.

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✍️ Editor’s Picks

Gilbert’s gamble: Billionaires have acquired 70% of Detroit’s offices, revitalizing the city by filling buildings with workers and attracting young residents back.
Tight market: High prices and rising interest rates in Houston’s urban land market are causing developers to hesitate, leading to stagnation and favoring well-capitalized investors.
Travel advantage: With the dollar strengthening, American tourists can enjoy increased purchasing power in top destinations, including Japan, where the yen is at its weakest in decades.
Big plans: Former Blackstone exec’s new firm raised $1.25B, surpassing its target by $250M, to invest in Sun Belt hotels, multifamily buildings, and warehouses.
Refinancing risk: Nearly £3 billion of European real estate loans sold to bond investors may not be refinanced due to current lending market conditions.
Cutting prices: The US housing market, previously hindered by an inventory drought, is now seeing increased listings, but many buyers are not appearing.

🏘️ MULTIFAMILY

Take back the keys: Russland Capital surrendered a 188-unit South Loop apartment complex in Chicago to its lender following an $80 million foreclosure lawsuit, equating to $402,000 per unit.
Senior housing: Dallas Housing Authority is planning a $45M, 360-unit mixed-income senior housing project, The Culbreath, in South Dallas’ Bonton neighborhood.
Debt-driven sale: Western Wealth Capital sold a 220-unit apartment complex in Arlington to Rise48 Equity due to revenue struggles, with the property appraised at $26.7 million.
Educational boost: UNC Charlotte research shows that renting single-family homes in high-quality school zones improves academic achievements for children from low and moderate-income families.

🏭 Industrial

Booming: Philadelphia is experiencing an industrial surge, with 55 MSF built or underway since 2020. However, residents are pushing back as large warehouse numbers rise from 24 to 189 by 2025.
Warehouse leases: Daikin Industries leased 111,452 square feet in LogistiCenters in Rohnert Park, CA, and Verdi, NV, with the Verdi site completing in Q2 2024.
Acquisition: DWS purchased the 413,230-square-foot Rockingham Farms Building 10 in Savannah, GA, for $50.8 million, with JLL representing seller Scannell Properties.
Data insights: On’ Squawk on the Street, ‘ Nadeem Meghji, Blackstone Real Estate’s global co-head, discusses the appeal of data centers and the top states for these facilities.
Manufacturing hub: Phoenix ranks as the third-best U.S. metro for manufacturing, driven by government incentives and technological advances, amid a historic resurgence in U.S. manufacturing.

🏬 RETAIL

CNN revival: CP Group and Rialto Capital Management plan to revitalize Atlanta’s mostly vacant 1.2 MSF former CNN Center into a vibrant retail, office, and production space hub starting July 1.
Short supply: Sun Life Assurance is selling the 74,700-square-foot Skillman Live Oak Center in East Dallas amid high retail demand and low supply in DFW.
Bigger format: Walmart’s new, larger Neighborhood Market format debuts in Santa Rosa Beach, FL, and Atlanta, with 57,000 sq. ft. of selling space, as part of a plan to open or convert 150+ stores in five years.

🏢 OFFICE

Revised bid: Miami-Dade County is retrying to buy a 625K SF office building, reducing its bid by $23M to $182M, to create a government office hub, with a vote scheduled for June 4.
ReWorked: WeWork has secured final approval to emerge from bankruptcy. Following a judge’s confirmation, it will become a privately owned, debt-free company.
Legal leasing: According to Savills, legal sector leasing activity in early 2024 reached 1.7 million square feet in Q1, surpassing the 1.5 million square foot quarterly average since 2020.

🏨 HOSPITALITY

Bad debt: Tushar Patel, once the second-largest property owner in Anaheim, is over 90 days delinquent on a $69.8M loan for the Anaheim Marriott, with no payments made since December.
Go ahead: A bankruptcy judge approved EOS Hospitality’s $177M bid for the William Vale hotel in Williamsburg, ending a long-standing property dispute and clearing the way for its transfer.

📈 CHART OF THE DAY

Coastal suburbs are thriving with stable revenue growth in the upper 3s, while coastal cities lag with just 1% growth, highlighting a post-pandemic shift as cities struggle to recover.