Spurred by the dim return prospects for stocks and bonds and an apparent turnaround in property markets, pension fund money began to flow back into real estate during the second half of 1993 and the first half of this year, according to Pensions & Investments' survey of real estate advisers.
The total amount of tax-exempt assets under management for the top 50 real estate advisers in the P&I survey increased about 2.8%, taking into account a 4% return of the Russell-NCREIF Property Index.
In 1994, the tax-exempt assets under management for the top 50 advisers increased to $120.4 billion, from $112.6 billion in 1993.
Many managers realized significant increases in tax-exempt assets under management. Such gains can take several forms - through the acquisition of other real estate firms; taking over property portfolios from other real estate managers; or receiving new money from pension funds.
As a result, the survey saw the largest movements in positions in several years.
The largest gainers include O'Connor Group, New York; MacFarlane Partners L.P., San Francisco; Kennedy Associates, Seattle; AMB Institutional Realty Advisors, San Francisco; and Schroder Real Estate Associates, New York.
Overall, Equitable Real Estate Investment Management remained at the top spot in the rankings with $11.4 billion of tax-exempt assets under management, a 5% increase from the year before.
But for some real estate advisers, the aftermath of the downturn continues to linger like the shakes on the hung-over. Chicago-based JMB Institutional Realty, No. 2 in P&I's survey since 1989, dropped to 11th place in tax-exempt assets under management.
As a result, Prudential Real Estate Investors moved up to second place with $6.7 billion of tax-exempt assets under management, a 19% increase from the year before.
Wells Fargo Realty Advisors, San Francisco, fell 15 places to 51 from 35; L.J. Melody & Co., Houston, dropped 13 places to 34 from 21.
Along with an apparent return of capital to real estate, the Russell-NCREIF Property Index - used by the pension real estate industry to measure performance - posted a one-year return of 4.08% for the period ended June 30. For the same period last year, the index posted a return of -3.66%.
The 4% return was the largest in several quarters, and the index finally might be headed upward after zigzagging between positive and negative in 1993.
According to data from Frank Russell Co., Tacoma, the index was negative from the fourth quarter of 1990 through the fourth quarter of 1992. It posted a small positive return in the fourth quarter of 1993 but went negative in the second quarter.
The index posted a slight positive return again in the third quarter and then closed 1993 with a negative return. It has been positive during both quarters of 1994, according to Tony Fiacchi, research associate with Frank Russell.
Among the 50 largest real estate advisers, the West still held the largest part of the portfolios, with 33.2%. That is down from last year's 37.4%, however. Investment in the South and East saw small gains, to 24.6% and 24% from 21.2% and 22.2%, respectively, while the Midwest dropped one percentage point to 18.2%.
The mix of property types among the Top 50 didn't show any major changes. Office/commercial and retail properties comprise the largest investment areas, at 25.5% and 24%, respectively. Office/commercial is down slightly from last year's 28.5%, and retail gained slightly from 23.4%. For the first time this year, P&I broke out the assets in timber, representing 7.6% of the portfolios, and single-family housing, at 1.1%. Among other property types, multifamily housing makes up 15.5% of the portfolios vs. 13.1%; industrial properties comprise 12.6%, vs. 14.3% last year; and hotel properties are 3.4% vs. 2%.
T. Robert Burke, principal with AMB, said he noticed a change in pension funds' attitudes to real estate in mid-1993.
"The industry was very slow up to mid-1993," Mr. Burke said. The outlook for stocks and bonds lowered and real estate started to pull out of its down cycle, he said.
"Suddenly there was a noticeable change in people's mood."
AMB's tax-exempt assets under management grew 78% during the year ended June 30.
Mr. Burke said some of that increase included deals negotiated in late 1992 and early 1993 but not closed until later in 1993.
He attributed the growth in the company's tax-exempt assets to the taking over of portfolios from other managers and an increase in acquisition activity for the firm's separate account clients.
Among the takeover business the firm picked up was a $30 million property portfolio for the $2.2 billion Board of Pensions & Retirement for the City of Philadelphia. MacFarlane Realty Advisors had been the manager.
AMB stands to pick up additional assets as the city of Philadelphia negotiates with its co-investors - the $2 billion Detroit General Retirement System and the $2.1 billion Detroit Police & Fire Retirement System - to take properties in lieu of cash from a troubled portfolio managed by MIG Realty Advisors, West Palm Beach, Fla.
O'Connor Group's tax-exempt assets under management increased more than 200%, largely on the strength of its acquisition of the asset management business of Eastdil Realty Inc.
According to Nancy Lashine, senior vice president, the acquisition of Eastdil's asset management business added $2 billion to O'Connor's assets under management. The portfolio was composed primarily of office and industrial properties.
The firm also formed Argo Partnership L.P. a joint venture with J.P. Morgan & Co., which Ms. Lashine claims has several institutional investors which she declined to identify. The partnership, which makes opportunistic investments, added $500 million in assets under management to O'Connor Group, according to Ms. Lashine. O'Connor vaulted to fourth place this year from 20th.
MacFarlane, meanwhile, jumped to 20th place in P&I's survey when it acquired Mellon/ McMahan Real Estate Advisors Inc. in April. The new firm now has $2 billion under management. Its predecessor, MacFarlane Realty Advisors, had $300 million under management at the time of the acquisition.
Schroder Real Estate Associates' tax-exempt assets grew 75%, to about $1.1 billion as of June 30 from $624 million a year earlier. John Emmanuel, senior vice president, said the fund took in a combined $436 million for a commingled equity fund, two separate accounts and a commingled separate account fund.
"It's been a tough couple of years, but the last one was a good one," said Mr. Emmanuel. "What we didn't get the last few years, we got last year."
Kennedy Associates also showed a significant gain in tax-exempt assets under management, growing about 45% from a little more than $1 billion under management to $1.5 billion.
Three new clients - the $77 billion California Public Employees' Retirement System, the $41 billion New York State Teachers' Retirement System and the $830 million Dallas Police & Fire Pension Fund - made up the bulk of the increase.
JMB Institutional Realty's tax-exempt assets under management declined 48%, dropping to $4.1 billion from $8 billion. According to William Ramseyer, managing director, the decline was attributable entirely to the firm's removal of Cadillac Fairview Inc. as an asset it managed for its pension fund clients.
Throughout the first half of this year, pension funds that invested in the 1988 takeover of the troubled Canadian property company sold their convertible debt, some at discounts as low as 20 cents on the dollar. Few of the approximately 40 pension funds remain as investors, according to sources.
Ironically, it was the Cadillac Fairview deal that catapulted JMB into the top echelons of the P&I survey in 1988.
According to Mr. Ramseyer, excluding Cadillac Fairview, JMB's tax-exempt assets under management actually increased, primarily because of increased separate account business.
According to Carol Spillman, marketing officer, the Wells Fargo Realty Equity Fund had been in a liquidation phase during the past two to three years and was finally able to meet withdrawal requests of about $100 million. The fund now has assets of about $110 million.
Also, a separate account with a public pension fund she wouldn't identify, which represented $300 million to $400 million at the "commitment level," decided to change managers, according to Ms. Spillman.
The decrease in tax-exempt assets under management appears significant because Wells Fargo had a lot of commitments and then activity slowed, Ms. Spillman said.
L.J. Melody & Co. lost almost 45% of its tax-exempt assets under management, dropping to $497 million as of June 30 from $907 million the year before.
Representatives from the firm were unavailable for comment.