Pension fund investors in real estate are willing to accept lower returns and higher prices as they strive to spend their allocations, industry experts said.
But market forces of low supply and high prices also are pushing investors beyond the traditional core investments.
"A year ago, they (pension plan officials) were talking about prices," said Dennis Yeskey, managing director, Deloitte & Touche, New York. "This year they are less concerned about values."
Part of the reason is that spreads are fairly high by historical standards, Mr. Yeskey said.
Real estate is producing steady returns, low volatility and low correlation with other equity investments, he said. What's more the competition for the best properties has caused values to rise, despite increasing vacancy rates and falling rents, he said.
But given the lag between the economy and real estate demand, it might be late this year or early 2005 before an improving economy results in a stronger real estate market, he wrote in a recent study, "Real Estate Capital Markets Industry outlook-Mid-2004 & Beyond."
"A lot of good things have happened. There are a lot of reasons to be somewhat optimistic," Mr. Yeskey said in an interview. "I'm optimistic compared to stocks and bonds. … The relative performance still remains relatively attractive."
That is, as long as there are no spikes in interest rates or costs, he added.
Meanwhile, pension plans, endowments and foundations are increasing their real estate allocations and keeping them high, even though it is hard to find real estate in which to invest, Mr. Yeskey said.