Pension Portfolios Fell by 24% Last Year

Real Estate Alert's annual review of public pension systems has documented just how big a toll the economic downturn took last year: The 50 largest plans saw their real estate portfolios plunge in value by a whopping 24% on average.

The decline is only the second in the review's 11- year history. And it was far higher than the previous drop of 6% in 2001. The portfolios plummeted in value by $39.3 billion, to $127.6 billion (see tables on Pages 6-9).

California State Teachers and Calpers, the two largest pensions, suffered the biggest declines by dollar amount. CalSTRS' portfolio dropped by $7.5 billion, or 37%, to $12.7 billion. Calpers' portfolio fell $7.2 billion, or 34%, to $13.7 billion. Overall, values declined at 44 of the 50 systems, with 12 falling by at least $1 billion. By contrast, only 16 pensions posted declines in 2008, with two experiencing losses of more than $1 billion.

Against that backdrop, it's little surprise that for the second straight year investors pulled back from commitments to new funds, separate accounts, joint ventures and wholly owned properties. Pledges plummeted to $5.1 billion, or just 31% of the $16.7 billion committed in 2008. There were 35 commitments, down from 163. Only one commitment was made to an opportunistic vehicle, compared with 44 a year earlier.

The only system that bucked the trend was Texas Teachers, which continued to ramp up its portfolio last year, with 11 commitments totaling nearly $2.5 billion. That was on top of $2.3 billion in 2008.

The outlook for commitments this year remains dim, for several reasons. While pensions are in a better position to invest because of the rebound in the stock and bond markets, they have more than $50 billion of unfunded commitments from 2007 and 2008. What's more, some pensions are focused on working with investment managers on troubled assets in their portfolios. CalSTRS, for example, made three commitments totaling $214 million last year that were aimed at bolstering existing investments.

Also, some pensions were so burned by losses over the past couple of years that they remain reluctant to allocate additional capital to alternative investments, including real estate. And others have indicated that they might choose only one alternative-investment category, rather than sprinkle capital across multiple sectors as they did in the past.

The downturn caused sharp fluctuations in the proportion of holdings in various asset classes. In 2008, when stock and bond prices plummeted much faster than real estate prices, real estate climbed to 8.7% of total assets, from 6.2% in 2007. But last year, stock and bond prices rebounded while real estate values were marked down, causing the percentage of real estate holdings to revert to 6.2%.

Cleveland-based Townsend Group remains the top real estate consultant to the largest pensions, with 23 clients among the Top 50, unchanged from a year ago. Courtland Partners, also of Cleveland, was the runner- up, with five clients, down one from a year ago. Thirty-six of the 50 pensions had a real estate consultant, down one from a year ago.

The review was based on the 50 public pension systems with the largest real estate portfolios. It didn't include commitments to vehicles that invest in REIT stock, timber or agriculture. It also excluded investments in private equity, infrastructure, real assets or hedge funds that didn't put at least 50% of their equity into commercial real estate. Also excluded were fresh commitments to existing separate accounts, joint ventures or open-end funds.

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