The California Public Employees' Retirement System isn't the only pension fund developing strategies to cope with the high cost of core real estate.
Prices and investor demand for core, high-quality real estate in primary markets are quite high, John McClelland, principal investment officer, real estate, for the $38.1 billion Los Angeles County Employees' Retirement Association, Pasadena, noted in a June memo to the board. Price and investor demand in other locations are weaker. As a result, LACERA officials are looking into buying non-core properties with the goal of turning them into core. Rather than selling the properties immediately after the upgrade, LACERA would hold them for the long term.
CalPERS also made an investment in the so-called “build-to-core” strategy as part of its industrial portfolio through CenterPoint Properties Trust, said Theodore Eliopoulos, senior investment officer, real assets.
While investors generally are moving past stabilized properties, there is still a substantial amount of money chasing core properties, said Suzanne R. West, one of the partners of Park Madison Partners LLC, a New York-based placement agent.
There is still a lot of capital that needs to be placed from earlier allocations and commitments to core, said Ms. West, who had been a real estate investment officer for the State of Connecticut Retirement Plans and Trust Funds in the 1990s.
“Stabilized assets are getting bid up,” she said.
Cathy Marcus, managing director and senior portfolio manager of Madison, N.J.-based Prudential Real Estate Investors, said investors talk a good game about moving beyond core real estate to take on more risk, but their portfolios are still moving toward core.
“Overall, there is a flight to less risk and, in general, it is a global phenomenon,” Ms. Marcus said. “There's a lot of talk by investors about going out on the risk spectrum but to me, there is a disconnect. Investors' portfolios are very, very concentrated in core.”
There are entry queues in most open-end core funds, she noted. The queues to get into Prudential's open-end core funds have been getting longer.
“Ours are at the small end of the queues … (but) they continue to be in the billions of dollars,” Ms. Marcus said.
And U.S. investors are not the only ones gravitating to core. Investors in Europe, Asia and Canada are very interested in U.S. core real estate, she said.
Ms. Marcus expects this movement to core to continue, at least in the near-term.
“As long as there is a fairly high level of uncertainty in Europe … a lot of global investors feel U.S. core is a safer place to be,” she said.