Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. Print
April 20, 1998 01:00 AM

BIG FUNDS INVEST IN REAL ESTATE DEVELOPMENT

Terry Williams
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Development was the longest four-letter word among real estate professionals earlier this decade when it was blamed for the oversupply of commercial space and the credit crunch afflicting lenders.

    But the word has returned to the realm of respectable language, and pension funds want to become fluent in its use.

    The $24 billion Colorado Public Employees' Retirement Association, the $69 billion New York State Teachers' Retirement System and the $29 billion Virginia Retirement System all have either invested in development projects or have committed to funds that will.

    Real estate advisers ERE Yarmouth, and SSR Realty Advisors also have undertaken property development either for separate account clients or as part of a commingled fund.

    Low vacancy rates, rising rents, tight supply and eager lenders have made commercial property development attractive for certain property types and in certain markets.

    "In the context of where we are in the cycle, we believe very strongly that this is an opportune time to put money into development-type projects," said Graham Bond, senior executive vice president of New York-based ERE Yarmouth. "One has to be focused in certain areas by asset type and region," Mr. Bond cautioned.

    "It occurs in pockets and one has to be selective, whether in relation to office development, retail or hotel," he said.

    "You are getting to the point that development makes sense from a pure economic standpoint," said R. David Webb. "You are starting to see more and more markets with rents that justify new construction."

    "In 1995, with apartments, you had significant number of markets that were hitting rent levels justified new construction," said Mr. Webb. "Industrials hit a year later, and office has been hitting over the last couple of years."

    SSR Realty Advisors Managing Director Joseph Gaudio concurs. His firm, through its Tower Fund commingled fund, started five years ago with apartments and progressed to industrial and suburban office properties about three years ago.

    The party is going strong, but it could be ruined by too much money, said Mr. Webb.

    "One scary thing that is going on is you have a lot of investors -- pension funds, REITs, the opportunity funds -- that are reaching for yield," said Mr. Webb. "That pushes you into thinking about more aggressive ways to invest and that leads to (speculative) development.

    "If we get too much money it could ruin the party for everyone," he said. "Things look good at this point."

    SSR has already cut back on its development plans. Plans for the Office Value Fund, which would have had a development component, were dropped last year because SSR officials felt development opportunities might have passed by the time the money was raised, said Mr. Gaudio,

    "It's getting a little late in the cycle," he said. "Many more buildings are coming on line.

    "When we did an office development in Lisle, Ill. a few years ago, we were one of two buildings under construction," he said. "Within a five-mile radius today, 10 buildings are coming out of the ground.

    "We wouldn't take some bets we took two years ago because of the increased level of competition," said Mr. Gaudio,

    The majority of pension funds didn't invest in development projects in the 1980s, preferring finished properties. Development of that era was characterized by building because money was plentiful, not because there was a need.

    But pension fund property portfolios were hurt nonetheless because the oversupply of space created by the development sent rents, and returns, tumbling.

    Development 1990s' style is characterized by trying to take advantage of opportunities in the market, which is the manner in which Colorado PERA is doing it.

    "It is a way to acquire properties in which we are under allocated to, and a way to be opportunistic," said Kim Roberts-Mosko, director of real estate for Colorado Public Employees'.

    "We wouldn't do a product type just to get it," said Ms. Roberts-Mosko. "The market should be right for development."

    Colorado has committed a total of $125 million to three development relationships with The RREEF Funds, Sage Hospitality Resources LLC and Miller Global Properties. The RREEF relationship was approved in 1996, though projects are just now getting underway; Sage and Miller received the go-ahead last year.

    RREEF will develop industrial properties in the western United States; Sage will focus on limited service hotels; Miller Global has no particular property focus or geographic constraints, but it will probably do suburban office investments, said Ms. Roberts-Mosko.

    Virginia and New York State Teachers' have thrown their hats in with experienced developer Hines Interests. New York Teachers committed $100 million and Virginia committed $50 million to the Office Development Fund, which will develop suburban offices.

    New York State Teachers also has developed an Atlanta office building; it has another under construction in Overland Park, Kansas; and the system is developing two apartment projects under construction in Houston and Dallas.

    ERE Yarmouth will pursue development opportunities in offices, retail and resort and central business district hotels, said Mr. Bond.

    The firm has done development through its Yarmouth Capital Partners opportunistic fund. It plans to begin raising a $300 million development fund this quarter and begin committing to projects by the third quarter, he said.

    "If one is to take advantage of the window of opportunity, one needs to be able to get that money appropriately invested," said Mr. Bond. "That is where I see our advantage.

    "We have our own pipeline, but we can also work with other developers who are ready to roll."

    Chances are, successful development this time won't be a roll of the dice.

    Funds get $5.7 million in court settlement

    The pension funds that owned 10 Los Angeles and San Fernando Valley office buildings damaged in the 1994 Northridge earthquake were finally made whole on their investment when a group of insurance companies settled a bad faith and breach of contract lawsuit.

    The pension funds received $5.7 million in an out-of-court settlement from the insurance companies, said Steven A. Fox, a partner with Davis & Fox, the Los Angeles law firm which represented the owners.

    Trust Company of the West and Westmark Realty Advisors were the trustee and manager, respectively, to the pension funds which invested via separate accounts and commingled funds.

    Among the investors were the pension funds for Ford Motor Co., Pacific Telesis Group, U S West, Pacific Gas & Electric Co., McDonnell Douglas Corp., United Mine Workers of America Health & Retirement Funds, the Board of Pensions of The Presbyterian Church, Minnesota State Board of Investment, Los Angeles County Employees Retirement Association and the Illinois Municipal Retirement Fund.

    The sticking point and the primary reason for the litigation was a dispute over the deductible on a series of excess insurance policies that Westmark bought from five insurance companies for the buildings, said Mr. Fox.

    The excess insurance was bought because the policy from the primary insurer limited liability for earthquakes to $10 million, said Mr. Fox.

    After the earthquake, the insurers claimed that the policy language stated that each damaged building must pay its own deductible before insurance payments would be made.

    "We disagreed," said Mr. Fox. "The policy language clearly stated that one deductible, the highest individual deductible among the buildings, apply to all the damaged buildings."

    An internal memo from an insurance company employee, concerned about the policy's wording, was uncovered during discovery and led to the settlement, he said.

    A portion of the $5.7 million settlement will compensate the investors also for loss of rental income, which the insurers claimed they were not obligated to pay, said Mr. Fox.

    "The insurance companies claimed that they were not obligated to pay rent loss for any tenants who left the buildings in breach of their lease because the resulting damage was caused by tenant conduct, not by the earthquake damage," said Mr. Fox. "Not only was this factually absurd, but the wording in the insurance policy stated otherwise."

    The insurance providers who settled are Firemen's Fund Insurance Co., Navigators Insurance Co., Westchester Surplus Lines Insurance Co., Homestead Insurance Co. and RLI Insurance Co.

    Suburban properties targeted by partnership

    A Singapore government investment subsidiary formed a $300 million partnership with Principal Financial Group to invest in suburban office properties, a spokesman for the insurer said.

    GSIC Realty and the Principal formed Principal Office Investors, which was seeded with six properties from the insurer's general account, said Frank Schmitz, relationship manager for Principal Office Investors.

    Principal Office Investors will acquire about $180 million of properties valued between $5 million to $30 million in major U.S. metropolitan areas.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    Citadel's Ken Griffin gives $125 million to Chicago museum; name will change
    Citadel's Ken Griffin gives $125 million to Chicago museum; name will change
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing