Pension Funds Are Loading Up On Commercial Real Estate

According to market research company Preqin Ltd. As of August 19, approximately 8.7% of total assets under management by North American public pension funds are allocated to real estate. These pension funds have more than $6 trillion in assets under management.

Commercial real estate, mostly office space, dominated a traditional pension fund’s portfolio before the pandemic as remote and hybrid work were rare. However, most public pension funds in the US and Canada are restructuring their real estate portfolio to invest in residential, infrastructure and industrial holdings.

times are changing

The 9-to-5 office, five days a week is no longer the norm. Many companies are adopting a hybrid work structure, while others are designing a permanent remote work arrangement. With lower overhead costs and surveys indicating improved employee productivity in a remote facility, companies worldwide are gravitating towards remote structures. Accordingly, the demand for commercial office space is falling rapidly.

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Fund managers are increasingly restructuring their real estate investments to reflect this societal change. According to an index by the National Council of Real Estate Investment Fiduciaries, private real estate funds have reduced their office stocks by around 10% over the past three years. As many as 40 of the largest public pension funds in the US are focused on changing their real estate holdings.

In addition, the California State Teachers’ Retirement System fund is restructuring its $312 billion portfolio to replace office buildings with residential, industrial and infrastructure properties.

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Michael Turner, president of the real estate division of the Ontario Municipal Employees Retirement System, expects office space to make up just 20% of the total portfolio over the next 10 years. The restructuring process has already begun as the fund has sold nearly $3 billion worth of commercial office space in the US and an $850 million tower in Toronto.

Commercial real estate asset classes on the rise

The commercial real estate sector is changing rapidly. While the housing crisis in the US has pushed up residential property prices, government policies announced last year are expected to shape infrastructure and industrial real estate. Although housing demand has slumped due to rising interest rates, median US house prices are still higher than a year ago as of August. In addition, construction of apartment buildings has started in the past month, according to the National Association of Home Builders.

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President Biden signed the one-off “Build Back Better” bill designed to modernize America’s infrastructure. The government has focused on improving domestic manufacturing as international tensions run high, which could push up US industrial property prices

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