CalPERS’ slow deployment pace continues

Competition and pent-up demand for core real estate are keeping prices high for the pension system’s favored strategy.

California Public Employees’ Retirement System’s real estate investment activity continues at a sluggish pace, the pension system’s property consultant said in a memorandum ahead of its August 14 meeting.

The Pension Consulting Alliance said that CalPERS invested $1.6 billion of capital in real estate in the fiscal year ending June 30, well under the $4.6 billion approved for deployment. Both the targeted and actual deployment in the asset class were significantly lower from the previous fiscal year, when $2.9 billion was invested in real estate, compared with $7.9 billion approved for investment, according to CalPERS’ website.

“Four or five years ago, if we gave [managers] $500 million, 50 percent would be put to work. This year, it’s looking more like 25-30 percent. Prices are moving up,” Paul Mouchakkaa, CalPERS’ managing investment director in real estate, said at the PERE Global Investor Forum: Los Angeles in April. “What does that mean for us? It’s much tighter and a more competitive situation.”

The challenges of capital deployment stemmed from core real estate’s increased valuations and “fierce” competition from groups including other pension systems and institutional investors dissatisfied with returns generated by fixed income strategies, PCA managing directors David Glickman and Christy Fields noted in the memorandum. Core real estate’s high prices have been driven by “significant pent-up demand for property in major, primarily coastal and gateway cities,” and the consultancy predicted continued strong interest in the strategy.

However, Glickman and Fields also added: “Managers and staff demonstrated good discipline in not chasing acquisitions. The decision-making processes continued to be improved, which will reduce the potential for future losses.”

Core real estate comprised about 80 percent of the CalPERS’ investments in 2016, a dramatic reversal of its 20 percent core allocation in 2007, chief investment officer Ted Eliopoulos said at the pension system’s December meeting.

PCA noted that some secular changes may be offsetting core real estate’s soaring valuations. Retail, for example, continues to evolve with the growth of e-commerce, among other catalysts, and millennials’ and baby boomers’ demand for apartment rentals is changing the design of new multifamily communities.

In the fiscal year ending June 30, CalPERS’ $30.5 billion real estate portfolio returned 7.6 percent, 24 basis points above its benchmark.

The pension system’s largest real estate managers last year were Miller Capital Advisory, which managed 20.6 percent of CalPERS’ total private real estate portfolio; San Francisco-based private equity real estate firm GI Partners, which oversaw 17.1 percent; and CommonWealth Partners, which accounts 14.7 percent of the pension system’s property holdings.