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Returns At Risk For Pension Funds Invested In CRE

Payments from pension funds keep thousands of Americans afloat financially, but their returns have been shrinking for roughly the last decade.

The fate of these funds and their commercial real estate investments are even more worrisome in the wake of the coronavirus crisis.

“If you had asked me before the crisis if I expected those expected returns to decline I would have the same answer, which is yes,” said Keith Brainard, research director with the National Association of State Retirement Administrators. “But I think this crisis has put an exclamation point on this for a lot of plans which is likely that they are going to reduce their investor return assumption.”


The coronavirus crisis could expand upon some of the negative trends of the past decade.

“One major factor that has been affecting public pension plans as a group, especially over the past 10 years or so, has been declining expectations for investor returns on their invested portfolios,” Brainard said. 

NASRA studied roughly 130 public pension plans and found about 70% have reduced their investment return expectations since the 2017 fiscal year, and 95% have done so since fiscal year 2010. Investment earnings account for 63% of public pension plan revenues, according to NASRA

“The typical or average investor return assumption among public pension plans has dropped from 8% [about a decade ago] to 7.25%, and that 7.25% is likely to continue to go down,” Brainard said.

Commercial real estate has historically been a solid long-term investment prospect for pension funds, which aim to produce the highest returns for the long-term benefit of the funds and pensioners. 

“They have been longtime investors in commercial real estate, [and they] know the asset class very well and the relatively long-term nature of commercial real estate tends to line up pretty well with their liability side,” Mortgage Bankers Association Vice President of CRE Research Jamie Woodwell said of pension funds and other institutional investors.  

Pension funds globally have an 11% allocation to real estate, the highest of any institutional investor class, followed by endowments (10.6%), according to the Pension Real Estate Association’s 2020 Investment Intentions Survey. 

Now the coronavirus pandemic has disrupted the income from commercial real estate assets that so many of these pension funds rely upon, turning the market into a maze of possible delinquencies, cash shortfalls and defaults.

“That’s one of the big questions is exactly how is this going to play out in terms of [the pandemic’s] effect on the ultimate returns that these investors are going to earn on their real estate assets,” PREA Director of Research Greg MacKinnon told Bisnow. “To be quite honest, the jury is still out on that.”

There is historical precedence for pension funds, particularly public pension funds, to fear what happens after the mass coronavirus shutdown. The National Public Pension Coalition, which advocates for public employee pensions, noted the 2008 recession wreaked havoc on public funds. A report from coalition representative Tyler Bond shows some state pension funds were more than 100% funded prior to the 2008 recession, and then saw their funded ratios drop between 5% and 30%. 

With shopping malls, hotels and offices closed and rent collection down, it is unknown whether private or public pension funds will experience even lower yields and shortfalls on declining real estate values. Certainly not every CRE asset class or portfolio of assets will suffer to the same degree or for the same period of time. It depends on many different variables, Woodwell said. 

“It's basically an unprecedented time,” MacKinnon said. “In large part, all investors for the next little while are flying blind.”


MacKinnon foresees pension funds looking further down the road in search of distressed assets that they can pick up at cheaper prices for long-term holds with higher expected returns.

“The distressed side is interesting because it actually provides an opportunity for some pension funds to come into [the market] and access returns,” MacKinnon said. “There are investment managers that are raising funds already from pension funds and other institutional investors to try to have capital on hand ... so they are able to buy a distressed asset at a reasonably low price and make extra returns that way.”

Since most pension funds are largely playing in the equity side of CRE, Woodwell said it behooves them to have the same type of discussion with lenders and tenants that other landlords are having to preserve their assets during the downturn.

“If you are talking on the equity side, the owners across the board, if they run into challenges with their property, the first step is to talk to their servicers,” Woodwell said. 

Fortunately, he said, many servicers experienced the last financial crisis from 2008 and are well versed in how to provide workout solutions for borrowers in financial stress. 

“One of the things we saw in the period of '08, '09 and '10 was looking at some of our loan maturity numbers and some of our loan originations data, you actually saw servicers in some cases through extensions and modifications able to extend more credit than what we saw going out in new loans in the originations market,” Woodwell added.