CalSTRS to reduce real estate pacing plan by 50% next year

The California State Teachers’ Retirement System is looking to strike a balance between managing a real estate portfolio already at its allocation target range while also gearing up to make new investments next year.

The pension giant, which holds the sixth spot on this year’s PERE’s Global Investor 100 ranking, has a 15 percent allocation target, with a range of 3 percent below and above that target. After approaching the top end of that range at year-end 2022, CalSTRS now is closer to a 16 percent allocation. The expectation is to come back to a 15 percent allocation by Q1 or Q2 of next year, according to real estate investment director Julie Donegan.

“We’re evaluating our pacing plan for next year,” said Donegan, speaking at the PERE Network America Forum in New York last week. “Historically, we’ve generally put out between $4 billion and $8 billion of new capital per calendar year. And looking at 2024, it’s probably going to be about half of that pacing.”

Although positive market momentum or stability with interest rates could offer the investor some “breathing room” with its real estate allocation, “we’re being mindful about where we place those dollars,” she added.

CalSTRS would focus first and foremost on ensuring its existing partners have sufficient capital to execute business plans, but also look to keep dry powder for new investments, Donegan said. “The opportunities we’re seeing today might be that much better in six months, in nine months,” she noted. “So we’re trying to balance care of the existing portfolio and being mindful this is probably going to be a really good vintage year 2024 to be investing in new transactions.”

If the investor does find a very compelling deal, “there is the opportunity for us to sell part of our portfolio and redeploy that elsewhere,” Donegan added. “So if we have a plan to come back down in terms of selling, we can then have the ability to deploy that capital into new opportunities.”

Given CalSTRS’ reduced real estate pacing plan for next year, the investor only wants its partners to bring the highest-quality opportunities to the table. “They obviously have a huge pipeline of opportunities, and we want to be very mindful about those deals that come in the door to us,” she explained. “So we’re pushing it back to them to say, look, ‘you know we’re being very selective about opportunities, please only bring us the very best deals,’ and have them monitor that pipeline.”

However, “new managers are not out,” Donegan stressed. “New deals, new partnerships will be of interest to us if it fits a specific piece of the portfolio that we don’t already have.” For example, CalSTRS is currently underweight in industrial and residential and has been looking at opportunities in self-storage, senior housing and data centers. “Those niche areas where we don’t have a defined partner, [where] we have fringe exposure in multiple places, that would be something that would be interesting for a new relationship,” she said.

Leadership transition

Ninety days into her new role, Donegan also spoke about the ongoing real estate leadership transition at CalSTRS. After holding one-on-one sessions with her staff as well as a team meeting to discuss potential changes to the operational aspects of the business, the executive is moving into the second phase of the transition. Beginning in January of next year, she plans to start a roadshow where she will meet with all of CalSTRS’ partners at their offices.

“It’s important for me to substantiate how critical our partners are in this business,” she remarked. “It’s not a one-way street because we have the capital. Our success is really dependent upon the success of our partners as well. So the next part of that transition will be solidifying and asking quite frankly, the same questions of our partners, ‘what’s working right now? What would you change? What can we do better as a partner for you being CalSTRS?’”

One aspect of CalSTRS’ real estate business that will remain in place is the investor’s ability to be nimble and react quickly to opportunities. “We prefer to say a fast no versus a slow maybe,” Donegan said. “I want to empower our team and our portfolio managers to have discretion in their parts of the portfolio, so that we can be responsive to opportunities.”

However, Donegan is considering adding a pool of analysts who can work across property types and alongside the sector specialists on the team today. “It is so valuable to the market to know, ‘if I need an office deal, I’m going to call [CalSTRS portfolio manager] Don Palmieri,’” she said. “There are some values and benefits to it being so clearly defined in the marketplace. But maybe there’s a hybrid way that we can structure our team.”