PLANSPONSOR - November 2011

Head of the Class

Facing overwhelming uncertainty at the end of 2008, many investors applied to their real estate managers to take some or all of their investment capital out of open-end funds. It is difficult to say whether investors were really quitting real estate, or just leaving temporarily, or trying to line up another option for raising cash to pay benefits.

However, the reason was irrelevant, because real estate managers were not able to sell properties to fund the requested redemptions: From $558 billion worth of properties changing hands in the Americas during 2007, transaction value fell 90% to $58 billion in 2009, reports Real Capital Analytics of New York.

to 40% of which has come from our existing clients, with the balance in new clients.” Add to that the billions in funds managers report as raised by separate accounts, as well as fresh capital from real estate investment trusts and there’s a wall of money that makes for a competitive market for commercial real estate.

Real Capital Analytics reports transac-
tions of $91 billion for 2011’s first half—
well shy of the record pace of 2007 but,
as the firm said in its summary of the
second quarter: “The acceleration in
sales cut across all property sectors and
was dominated by the U.S., up 124%
year over year, the highest gain among
major economies globally.”
martino, Partner at Townsend Group,
specialist consultants on real estate
investment, based on Cleveland.

Nor did investors find the bargains they anticipated at the other end of the quality spectrum once the financial crisis had passed. “There hasn’t been as much distress as people expected, and no one really seems to be able to explain why,” observes Jeffrey Kanne, Managing Director of Real Estate for NEBF Investments, the pension arm of the International Brotherhood of Electrical Workers. “We’re working on buying a few foreclosed properties from banks, but it hasn’t been the manna from heaven we thought it would be.

As a result, prices of high-quality, fully
leased “core” commercial properties in
resilient markets such as New York and
Washington have recovered quickly, in
some cases trading at valuations above
the pre-crisis peak, says Anthony Fram-
“Properties that are well-situated and
well-leased are selling now for very low
cap rates—far too low, in my opinion,
for the risk,” Kanne adds. “That’s espe-
cially the case for apartments, which
today are valued at cap rates as low as
Accordingly, the line for withdrawals
from real estate funds grew to be
substantial: “The exit queues on funds
we monitor started to ramp up in the first
quarter of 2008, when some investors
saw real estate as pretty richly valued,
and then, as we moved into the financial
crisis, we saw the real increases,” noted
Sarah Angus, Vice President in Real
Estate Consulting at Callan Associates,
San Francisco. In early 2009, the size
of the exit queue peaked at about $11
billion, or about 10% of total assets in
the funds.

Value Added
Total return indexes for core (ODCE) and value-added U.S. commercial real estate
(1989–2011)
Value added
ODCE
500
Trickle, Down?

As the crisis subsided, the line to get “out” ticked down by about $2 billion per quarter, and another queue, for investing new capital, started growing in early 2010: “All the funds had exit queues at one point, where now there is only one, and all the rest have entry queues, probably totaling $9 billion in second quarter 2011,” Angus reports. 100

200
300
400

At J.P. Morgan, Kevin Faxon recalls considerable capital raising and investing in 2010 for its flagship core real estate fund. “Today, we have a contribution queue in excess of $2 billion, about 30%