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Pension Fund Appetite for Commercial Real Estate Is Fading Fast

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U.S. Public Pension Fund After New Funding commercial real estate The sector has cooled rapidly and cut new investment at a record pace in the first half of this year.

These retirement funds have made new financial commitments worth $32.6 billion to office buildings. Warehouse, hotels and other commercial properties in the first six months of 2022, according to Ferguson Partners, a professional services firm that tracks the industry. These investments, made through financial institutions and funds, increased him nearly 40% from the same period in 2021.

Ferguson director Scott McIntosh said property demand was very strong in the first half of the year as investors were still returning to the market after the disruption caused by the early stages of the pandemic. In early 2022, when inflation was just beginning to become a concern, many investors saw real estate as an excellent inflation hedge.

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“Real estate was generating strong returns,” McIntosh said.

However Rise in borrowing rates Bad news for interest rate sensitive sectors. Growing Recession ConcernsOn the one hand, it could discourage property owners from aggressively raising rents as they have done in the past.

Ferguson has yet to complete a tally of its pension fund commitments for the third quarter, but McIntosh said it is likely to decline in the second half of the year. “We have this undesirable inflation problem,” he said. “There are also issues around labor costs and supply chain disruptions that make construction much more expensive.”

Private equity funds and other real estate investors, who rely on pensions and other institutions to raise money for new funds, say they’ve noticed a difference.

Some real estate investors, including New York-based Blackstone, are noticing a decline in demand for commercial real estate.


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Angus Mordaunt/Bloomberg News

“It’s harder outside,” said President Jonathan Gray.

black stone Ltd,

In last week’s earnings call on the funding environment for institutional investors.

Real estate funds managed by private equity firms had raised $112.8 billion from pension funds and other institutional investors as of Oct. 20, compared with $157.9 billion in the same period last year, according to data firm Preqin. Market participants believe Q4 funding will be well below the record $80 billion raised in Q4 2021.

Last year, at this point, the market felt: Inflation will be short-lived and interest rates will likely be manageable,” said Dave Lowery, Preqin’s head of research insights. “A lot has changed since then.”

Slowing funding is one reason commercial real estate sales are sluggish. Investors said he bought $172.2 billion worth of commercial real estate in the third quarter, down 21% from the year-ago quarter, according to new MSCI data released last week.

Falling sales, in turn, are putting pressure on prices. Pension funds and other large investors are currently reluctant to make commitments to new funds because they don’t know how far their values ​​will fall in the event of a recession.

“A deal today could be even cheaper tomorrow,” said Michael Stark, co-head of PJT Parkhill Real Estate Group, a placement agent that acts as a capital advisor between investors and fund managers. said.

Many annuities limit new commitments to real estate due to something known in the investment world as the “denominator effect.” These annuities want to limit their asset holdings to a certain percentage of their total portfolio. Real estate holdings as a percentage of total holdings rose at the beginning of the year, partly because stock market positions were shrinking rapidly. In some cases, it means pension funds have too much exposure to real estate compared to their overall benchmarks and now need to cut those positions.

Some annuities are also eyeing opportunities that may involve problematic properties. economic downturnThe Connecticut Retirement System and Trust Fund, for example, is looking not only to “take advantage of capital shortfalls in certain areas,” but also “to exploit market woes,” a spokesperson said.

Write a letter to Peter Grant at [email protected]

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