For most US institutional investors, the sweet spot for a real estate allocation is around 10 percent of their portfolios. But Rice University is not most investors.
The Houston-based university has nearly 14 percent of its $8.1 billion endowment invested in property, Ryan LeVasseur, managing director of Rice Management Company’s direct real estate platform, said during the National Association of Real Estate Editors annual conference in Miami last week. And it could stand to add more to reach its target of 15 percent.
Rice has a few fund positions as well as joint venture partnerships with five nationwide developers that provide it with the right of first refusal on projects, LeVasseur told PERE. But more than half of its real estate exposure comes from land in Houston it has owned for some 80 years.
He declined to provide more specifics on the targeted strategies of those funds and partnerships. Rather than divest from these strategies to bring itself in closer alignment with its peers or dial down concentration risk, the endowment plans to drive more capital into them in the years ahead. Rice also intends to allocate more capital to its local land holdings.
“We very much intend to hold onto what we have as real estate investments very close to the university, because that has not just an economic impact on the university, it also has an impact on the recruitment opportunities for the university,” he said. “Our investments have a secondary benefit of being an amenity for Rice, so there isn’t a need to recalibrate.”
A higher target
Around the world, the average institutional allocation to real estate is 9.3 percent against a target of 10.7 percent, according to the 2021 Allocations Monitor survey released by New York-based capital advisory Hodes Weill & Associates. In the US, exposure to the asset class is slightly less, with an average allocation of 8.6 percent against a 10.1 percent target.
Endowments and foundations have been more bullish than other investor types when it comes to real estate, according to the Hodes Weill report. On average, those groups increased their target allocations by 190 basis points from 2020 to 2021. Last year, endowments and foundations reported an average target of 9.5 percent, which was up from 8 percent in 2019.
Still, Rice’s conviction for real estate puts it in rarefied company. It joins public pensions such as the California State Teachers’ Retirement System, which also targets 15 percent exposure to real estate for its $310 billion portfolio.
Appreciation in other asset classes during the pandemic, including Rice’s venture capital portfolio, which has more than doubled in value, has given the endowment room to grow its real estate exposure further, LeVasseur told PERE.
The Amazon effect
Rice has had a large exposure to real estate for decades, but it had little incentive to invest in its local holdings until 2018. That year, despite being the fourth largest city in the US, Houston was left off the 20-city list of finalists in the continent-wide search for Amazon’s new headquarters.
LeVasseur said Houston was snubbed was because it lacked the dynamic office properties and walkable neighborhoods that Amazon put at the top of its wish list. Concerned by what this meant for the future appeal of the city and university, Rice president David Leebron gave the endowment a mandate to address those concerns.
“When president Leebron said, ‘We need to step up; we need to do something.’ [Rice Management chief investment officer Allison Thacker] and my colleague Alan Arnold said, ‘We can do it; let’s run with it,'” LeVasseur said.
At the heart of this effort is the Ion District, a new neighborhood to be built on 16 acres of university-owned land between downtown Houston and the Rice campus. The endowment has already invested $120 million into redeveloping a former Sears department store into 266,000 square feet of high-amenity office space, LeVasseur said. He anticipates committing roughly $100 million more to other projects in the district in the near term.
Looking for partners
Yet, while Rice is keen to maintain control over assets in the district – which will be built out to between 3 million and 5 million square feet of commercial and multifamily space – it is willing to relinquish some say in how those properties are developed to market forces. LeVasseur said the endowment has some loose ideas about what it wants in the neighborhood, including offices, retail, residential and a Broadway-style theater, but ultimately its participation will be as a ground lessor and co-investor.
“We want to leverage the capacity of world class developers, so we’re out to market right now with a request for proposals to developers to build the next three buildings,” he said. “We have said in that RFP: let’s take advantage of Houston’s lack of zoning…so developers, come back to us and tell us what you think the appropriate mix [of properties] is.”
The endowment expects to have a decision about next steps for the development of its local real estate by next summer.