US public pension plans continued to pull back significantly on their real estate commitments during the third quarter, according to a new report from FPL Consulting.
Commitments to real estate managers have been declining since the fourth quarter of 2015, when total earmarks were reduced from $13.2 billion to $8.2 billion, according to the Chicago-based advisory firm, which has tracked commitments since 2011. Real estate commitments bounced back to $11.8 billion in the first quarter of 2016, fell again to $9.1 billion from April to June and then ticked slightly up to $9.5 billion from July through September.
Despite a minor increase from the previous quarter, the third-quarter commitments represent nearly a 29 percent decrease from the same time last year, the report said.
“The question coming out of the second-quarter results was really whether the decline in commitment volume was a blip on the radar or indicative of a broader trend, and the third-quarter results confirm that this is in fact a more sustained pullback from investors,” Erin Green, a director at FPL, told PERE. “There’s a lot of uncertainty in the world with the forthcoming [US] election, the future interest rate environment, etc. and that, combined with the fact that asset pricing is at or near all-time highs, has a lot of people pushing the pause button.”
Pensions committed $30.7 billion through the first nine months of the year in 2014, then $37.9 and $30.5 billion during the same periods in 2015 and 2016, respectively, according to the FPL report. Over this time period, investors have moved up the risk curve in allocations. In the first nine months of the year, 70 percent of commitment dollars were earmarked for value-add and opportunistic strategies, compared with 64 percent over the same period in 2015. Core funds, by contrast, have commanded 18 percent of allocated capital this year, compared with 29 percent in the first nine months of 2015.
“It’s tough to predict the future but, as we sit here today, we don’t foresee a dramatic rebound propelling us back up to 2015 [commitment] levels in the immediate future,” Green said. “Likewise, we aren’t hearing or seeing anything that would suggest that a precipitous drop off is imminent. Instead we’re likely looking at a slightly more conservative and subdued, but still active, equity capital raising environment in 2017.”