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Pandemic Didn't Make Pension Funds Skittish About CRE Investing

As real estate investors, pension funds are known for playing a long game, and their target allocations in real property assets have been slowly but steadily increasing in recent years.

Though some funds took a pause in increasing their commercial real estate allocations during the coronavirus pandemic, the trend of incrementally greater investment by pension funds has continued. The reason is straightforward: Returns have been increasing as well.


Between 2019 and 2020, a number of major U.S. pension funds reported increasing their target allocations to real estate by more than 100 basis points, including the Kansas Public Employees' Retirement System (11% to 13%), the California State Teachers' Retirement System (13% to 14%), the Iowa Public Employees' Retirement System (7.5% to 8.5%) and the San Diego County Employees Retirement Association (9% to 10%).

Some non-U.S. pension funds raised their real estate allocations even more in 2020, such as Alecta in Sweden (up from 12% to 20%) and the Pension Fund for the Dutch Construction Industry (16% to 19%).

Other funds, by contrast, took a pause in 2020, such as the Teachers Retirement System of Texas, which currently has about $160B in assets under management.

"As for new allocations to real estate, the last change was in late 2019, when TRS amended its strategic asset allocation, moving real estate up a percentage point from 14% to 15% of assets under management," TRS spokesman Rob Maxwell said. "No further changes are planned."

Pension funds are also more comfortable now with risk in the commercial real estate space, according to the 2020 Institutional Real Estate Allocation Monitor. Both public and private pensions shifted toward opportunistic strategies in real estate last year. They reported increases of 18% and 11%, respectively, in their allocations to that class of property.

The Allocations Monitor, which was produced by Hodes Weill & Associates and Cornell University's Baker Program in Real Estate, includes research collected from 212 institutional investors worldwide that hold assets under management totaling about $12.6 trillion and have real estate totaling about $1.3 trillion. 

As a survey of institutional investors, the Allocations Monitor found that allocations to real estate continue to rise globally in 2020 despite the health crisis, though the pace of growth slowed down. Average target allocations in real estate increased to 10.6% in 2020, up from 10.5% in 2019, and up 170 basis points since the survey began in 2013.

Real estate continues to perform well for institutional investors. The survey found that real assets generated an average investment return for all institutional investors of 8.5% in 2019, better than the average return target of 8.3%. Returns for 2020 aren't clear yet, however.

Pension funds tend to move slowly when it comes to allocation changes. The California Public Employees' Retirement System, for example, which has $392.5B in assets under management, sets its asset allocation every four years.

The ALM process includes a review of CalPERS’ investment portfolios and retirement plan liabilities, and a determination of capital market assumptions, which are primarily based on expectations of future investment returns. The fund bases its liability projections on demographic and economic factors, such as future membership dynamics, salary and payroll growth, as well as retirement ages, inflation and life expectancy.

CalPERS headquarters in Sacramento.

Like other investors, pension funds moved more in 2020 into industrial and life sciences, according to anecdotal evidence.

For instance, the Los Angeles City Employees’ Retirement System has approved a $40M commitment to GLP Capital Partners' value-add U.S. industrial fund, GLP Capital Partners IV, IP&E Real Assets reports. The move is part of LACERS plan to increase its exposure to industrial real estate.

The expansion into logistics by North American pension fund investors isn't just about acquiring more properties in North America, but also about taking a worldwide approach to finding top income-generating properties.

Recently Canada Pension Plan Investment Board and ESR Cayman Limited raised their investment in their Korea Income Joint Venture by $500M, doubling the JV to $1B. The joint venture has a focus on logistics assets in major South Korean metros and currently holds about 8.3M SF of such assets.

“Korea is already one of the most developed e-commerce markets in Asia and the pandemic has accelerated the growth in the past year, further fueling the demand for logistics facilities," CPP Investments Head of Asia Real Estate Jimmy Phua said. "By expanding our successful joint venture with ESR, we are able to meet the fast-growing demand.”

In late April, CalPERS and GI Partners acquired 130-150 Shoreline Drive in Redwood City for $81M. That represented a deal driven by the burgeoning life sciences industry, in this case in Redwood City and neighboring northern California cities.

Life sciences is also attractive to overseas pension funds. Bouwinvest, a Dutch pension fund with nearly $16B in assets under management, is looking to expand its presence to around $2B over the next two years, up from the $1.65B North American portfolio it already holds.

One of the biggest moves the fund made in the last year was in life sciences, Bouwinvest North America Senior Portfolio Manager Bert van den Hoek told Bisnow. The fund committed $60M to Blackstone's recapitalization of BioMed Realty, owner of life sciences assets in some of the largest U.S. biotech clusters.

Pension funds are also reportedly interested in single-family rental housing, as that industry expands. In March, CalSTRS and Pacific Coast Capital Partners formed a $1B joint venture to buy single-family housing. So far CalSTRS and PCCP, which usually buys apartment buildings and office towers, have invested $240M to buy entire build-to-rent properties in Georgia, Florida, Tennessee and North Carolina, The Real Deal reports.

Another trend among pension fund investors that the pandemic didn't derail is the industry's growing interest in environmental, social and governance investment.

ESG as a factor in investment strategy is now a well-established international trend. The Principles for Responsible Investing network, formed in 2005, now has around 3,100 signatories, including asset owners, asset managers and service providers, with a total of $110 trillion in assets under management.

Some recent ESG actions by pension funds have been quite granular. Last year, CalPERS urged Weis Markets, a Mid-Atlantic regional supermarket chain, to diversify its board, one of a series of actions by the pension fund pushing for changes at its portfolio companies.

The investor, which owns 12,900 shares in Weis Markets, raised a series of concerns with the governance of the company, the top of which was a lack of response from Weis Markets to CalPERS requests to engage on diversifying its board.

CalPERS declined to detail the future direction of its ESG initiatives, though the fund is most of the way through a five-year plan that uses ESG to help select its investments. Putting pressure on companies it has invested in to mitigate environmental risks, such as carbon emissions, and promote social goals, such as diversity and inclusion, is part of its strategy.

When it comes to ESG issues, pension funds and other asset owners are more interested in their beneficiaries' preferences than they used to be, according to a new report released by PRI, which interviewed 14 asset owners worldwide on how they engage with beneficiaries.

Their beneficiaries' preferences "would be a fundamental aspect of an asset owner's investment strategy, policy and strategic asset allocation," the PRI report said. 

There has also been some pushback against ESG-oriented investing by pension funds. Most notably the Texas legislature has passed a bill, which is still awaiting Gov. Greg Abbott's signature, that requires the state's pension funds and Texas’ K-12 school endowment to divest from companies who refuse to do business with fossil fuel-based energy companies, or who have a policy not to invest in them.