Institutional investors have been grilling real estate money managers producing shrinking returns but, so far, the consultants who vetted those investments are not feeling the heat.
Investors who searched for real estate consultants last year most often retained the incumbent, Pensions & Investments' data show, despite returns that fell well behind all other asset classes in their portfolios.
“Our default position is that consultants are performing as expected. The fact that we retain them is a statement of satisfaction because we can get rid of them if we weren't (satisfied),” said Robert Whalen, spokesman for the $126 billion New York State Common Retirement Fund, Albany. The fund's real estate consultant, The Townsend Group, like its other consultants, can be terminated at will, he said.
But industry insiders wonder whether pension fund boards will lose patience — and some consultants might lose clients possibly even this year — especially after the write-downs and write-offs taken in the third and fourth quarters of 2009 are revealed.
A few large plans are due to launch real estate consultant searches this year. The $207 billion California Public Employees' Retirement System, for example, plans to search for a primary real estate consultant later this year. The contract of incumbent Pension Consulting Alliance Inc. expires in about 18 months. The Sacramento-based system also issued in July a request for proposals for its pre-approved list of real estate consultants, who work on a project basis, whose contracts expire in June.
The $32 billion Maryland State Retirement and Pension System, Baltimore, is in the midst of a search for a real estate consultant. It launched the RFP in November because the contract of its current consultant, PCA Real Estate Advisors, expires May 1. (PCA Real Estate Advisors is a firm unrelated to PCA that was set up by former PCA partner Nori Gerardo Lietz.)
Complicating matters is that starting in 2004, when money was flowing into real estate, a number of real estate consultants added more lucrative investment management businesses such as fund of funds and discretionary investment management. Townsend Group provides New York State Common real estate consulting as well as investment management services, Mr. Whalen said.
Real estate portfolios of the largest investors using specialized real estate consultants have suffered greatly in the economic meltdown:
• CalPERS' $13.4 billion real estate portfolio dropped 47.5% in the year ended Sept. 30.
• The Pennsylvania State Employees' Retirement System's real estate portfolio returned -8.9% for the quarter ended Sept. 30 — the only asset class that produced a negative return. The $24 billion pension fund, a longtime client of consultant Townsend, recently cut its long-term real estate target allocation by one percentage point to 7%. Real estate now makes up 8.7% of the total fund.
The board retained Townsend as the fund's real estate consultant, after issuing a request for information in November.
• The $131.9 billion California State Teachers' Retirement System's $12.9 billion real estate portfolio returned -43% for the year ended March 31, the most current information available. Townsend is its real estate consultant.
• The $5.9 billion Arizona Public Safety Personnel Retirement System's relatively new $500 million real estate portfolio was down 11.3% for the year ended Nov. 30. ORG Real Property has been the fund's real estate consultant since it started the portfolio less than three years ago.
• The $67.3 billion Ohio Public Employees' Retirement System's $4.2 billion real estate portfolio returned -3.86% for the quarter and -12.2% for the year ended June 30. Its consultant is Townsend Group.
• New York State Common Retirement Fund's real estate portfolio returned -26.3% for the year ended March 31, the most recent data released by the fund.
Like most large real estate investors, executives at the New York State fund are in the midst of reviewing their real estate holdings, managers and consultant. Some of the money management firms have gone bankrupt and the value of properties overall has “dropped precipitously,” said Mr. Whalen, the fund spokesman.
“We're pursuing strategies to correct and improve the situation,” Mr. Whalen said. “Included in this is we had to evaluate the counsel we are getting.”
CalSTRS' staff is in the midst of reviewing its real estate portfolio and meeting frequently with real estate money managers, said Ricardo Duran, fund spokesman. One of the many factors CalSTRS officials use to evaluate its real estate consultant is portfolio performance, Mr. Duran wrote in an e-mail response to inquiries.
At CalSTRS, the real estate consultant works directly for the board, which reviews its performance annually in October.
If investors do finally make the move to switch real estate consultants, the sword could fall quickly. At New York State Common, the real estate consultant can be terminated at will. Consultants can be fired quicker than a money manager, Mr. Whalen said.
Because real estate consultants make up a very small group, investors have limited choices.
Cleveland-based Townsend Group dominates the real estate consulting field among public pension funds, according to P&I data. Others with large pension fund client rosters are Courtland Partners Ltd. and ORG Real Property. General consultants PCA, Callan Associates Inc. and Ennis Knupp & Associates Inc. also make the list for estate consulting practices.
Pension Consulting Alliance has a brand new real estate group, which has been a point in its favor with investors, said Christy Field, managing director, who heads PCA's real estate practice. Ms. Field was charged with rebuilding PCA's real estate consulting business after Ms. Lietz left in 2007.
“It's helped with plan sponsors that we are a new team without legacy issues with investors and their relationships with managers,” Ms. Field said. “It has been an advantage to us in this climate.” The firm has won four new real estate clients in the last two years.