Pension funds based in the U.S. and Canada are unwinding their bets on office buildings and retail as they reckon with the potential for big value declines.

North American public pension funds manage more than $6T, allocating almost 9% of that amount to real estate. Office has long been the preferred real estate asset class for these funds, but its share of investment has rapidly dwindled — office holdings now account for 23% of private real estate funds' holdings, down 11% from three years ago, according to National Council of Real Estate Investment Fiduciaries data reported by The Wall Street Journal.

The funds are reducing the size of their office portfolios even as they seek to increase their real estate assets in response to changing attitudes to physical work environments. Forty of the largest U.S. public pension funds mentioned plans to increase real estate holdings during recent meetings as part of a change to investment strategies, the WSJ reported.

Many U.S. and Canadian pension funds are slashing office holdings as they predict that the five day pre-pandemic workweek will not return, according to the WSJ.

Michael Turner, the president of Oxford Properties, the Ontario Municipal Employees Retirement System’s real estate arm, told the WSJ that he expects the $90B pension fund’s investment in office to fall from 25% of its holdings to 20% within the next 10 years. Six years ago, office made up 44% of Oxford's holdings.

“On average, hybrid work will likely result in less office demand per employee over time,” Turner told the WSJ.

Office buildings were in oversupply before the pandemic, with analysts anticipating that remote work could see a 20% reduction in demand for office spaces. One report this summer estimated that as much as $500B in value could be lost from the office market as a result of remote work.

Retail, which struggled as an investment for years before the pandemic, which then exacerbated weak properties' performance, is also losing traction, with private real estate funds dropping their holdings in retail spaces from 17% down to 10% over the past three years as the pandemic strengthened e-commerce’s grip on consumers.

Investment strategies appear to be changing due to the largest difference in returns on different asset classes in two decades, the WSJ reported. According to a Teacher Retirement System of Texas’ analysis, office space showed returns of just 0.69% in Q2 2022, while industrial properties offered returns just over 6%. Industrial properties now account for 31% of private real estate funds’ investments, compared to 18% in 2019, and pension funds are also looking for stakes in utilities, highways and airports.