Historically, retirement funds have been major owners of New York City’s office buildings. Out of them would flow stable, predictable income, benefiting pensioners from around the globe.
But some of the city’s largest office deals this year have come from pension funds offloading those same properties as the institutions reevaluate their portfolios and what assets are deemed safe harbors.
“There were some fairly strict and, in hindsight, outdated ways of thinking about what real estate is that led to a higher allocation than what was optimal to both office and retail,” said Scott Crowe, chief strategy officer and head of equity capital markets for RXR.
Bisnow/created with assistance from ChatGPT
Pension funds have long heavily invested in office buildings.
RXR recently made NYC’s largest nonuser office acquisition since 2018, partnering with hedge fund Elliott Investment Management to spend almost $1.1B on 590 Madison Ave. The seller was the State Teachers Retirement System of Ohio, which bought the building in 1994, during Rudy Giuliani’s first year as mayor.
The pension fund, which serves the state’s 544,000 educators, made the largest of a handful of headline-grabbing sales in just a matter of months.
A joint venture between the California State Teachers’ Retirement System and Silverstein Properties shed 1177 Sixth Ave. for $572M, just four years after they bought out a partner at an $860M valuation. CalSTRS and Silverstein had owned the tower since 2007, when they paid more than $1B to acquire it.
Taconic Partners and Nuveen Real Estate, the property arm of the Teachers Insurance and Annuity Association of America, got rid of 440 Ninth Ave. for $100M after buying it for $269M in 2018.
MetLife, which provides insurance and employee benefits, could be joining them. The financial services company, in partnership with Beacon Capital Partners, is reportedly marketing 575 Fifth Ave., asking north of $400M.
Yet pension funds have spent the past two decades increasing their real estate exposure, and they say they aren’t backing away now.
Between 2001 and 2023, the average plan shifted about 20% of its assets away from traditional stocks and bonds into alternatives, such as real estate, private equity and hedge funds, according to a June report by Aon and the National Institute on Retirement Security.
Consequently, median target asset allocations to real estate rose over time, from 4% in 2001 to 7% in 2011 and 9% in 2023. That percentage held steady during the years that followed the onset of the pandemic. Certain funds even increased real estate investments to as much as 18% in 2022 and 2023, according to the report.
“We don’t see plans eliminating their real estate exposure,” Mercer U.S. Chief Investment Strategist Jay Love said. “Most of the large pension plans in our clients recognize that the best time to buy something is when the price has gone down.”
Pension funds use the National Council of Real Estate Investment Fiduciaries Fund Index for Open-End Diversified Core Equity to gauge the performance of core real estate — the kind that produces stable returns and hedges against inflation. But the benchmark is evolving.
Traditional property types — apartment, office, retail and industrial — comprise the vast majority of ODCE funds. In 2010, alternative assets, such as data centers, healthcare and lodging, made up just 3%. As of the start of 2024, that was up to 13%, according to the Pension Real Estate Association.
But the evolution has been slow. For comparison, alternatives made up more than a third of the Nareit property index in 2010. By 2024, the share increased to about 60%, according to PREA.
Now, pension funds that are heavily weighted in office have two options: reinvest in those assets to bring them to the Class-A conditions required to attract tenants or sell them off to someone who will.
CalSTRS and Silverstein sold 1177 Sixth Ave. last month at a sizable loss after an 18-year ownership tenure.
Luckily for them, the buyer pool has finally opened up, even if the prices are below what the funds initially paid.
Matt Carlson, executive vice president and co-head of U.S. office capital markets for CBRE, said that in the 12 months leading up to the end of the third quarter, CBRE tracked 975 unique bidders on office properties across 21 major markets in the country. That is up from 550 during the same period last year.
In addition, the average number of bids per property more than doubled, from six to 13. And those bidders are far more serious, he added.
“Fifteen months ago, if you got six bids, a lot of them were just trying to keep an eye on the market,” Carlson said. “[Now] the backup buyers have real FOMO. They really wish they got the deal. That’s when you know that the market is improving.”
In selling office properties, pension funds are able to unlock liquidity, which can then be used to reinvest in other property types. In some cases, the money is going right back into the office market, but less directly.
Asset managers have ballooned in popularity among institutional investors. More than 90% of investors now hold both private equity and private credit, up from 45% in 2021, according to a survey of 800 global institutions by Nuveen.
REITs are also in favor. While defined benefit pension plans’ total assets have increased approximately 12% over the last six years, REIT exposure grew by 30%, according to a Nareit analysis of nearly 2,000 plans.
Many asset managers and REITs remain invested in offices and, in some cases, are buying even more. But unlike pension funds, they are specialists that can reap the rewards for themselves and their investors, according to Tanuja Adiani, a managing director at IQ-EQ, a global investor services group with more than $850B in assets under administration.
“You’ve got the RXRs, you’ve got the Apollos, you’ve got the Carlyles, the Tishmans,” Adiani said. “You’ve got the people who have been real estate-focused for so long that they’re not just asset managers, they’re owners, operators, developers.”
RXR bought 590 Madison Ave. from a pension fund. Now it is hoping pension funds invest back into it.
In September, the firm launched its Gemini Office Venture. Its stake in the recently acquired tower, along with the Starrett-Lehigh Building and 1211 Sixth Ave., was put into it.
Moving forward, other office owners are able to contribute assets, getting them off their books and eliminating the headache of operations. In exchange, they will get some liquidity back and diversify their exposure through the RXR-managed vehicle.
Gemini will be RXR’s “primary growth vehicle” going forward, according to Crowe.
U.S. and Canadian pension funds, as well as sovereign wealth funds and other international investors, have already expressed interest, he said. The Ohio teachers fund, however, doesn’t have a stake in Gemini, as the 590 Madison purchase was part of creating the initial structure for the venture.
“That’s how we’re looking to solve the problem of today,” Crowe said.