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Real estate pros are partly surprised but wholly joyous about the return of liquidity. Banks, mortgage companies, commercial mortgage securities, REITs and pension funds were the key capital providers in 1994, a year in which an estimated $286 billion in public and private equity and debt flowed into the industry. While rising interest rates cloud the future of REITs, pension funds are on track to increase real estate investment 40% though 1996.
According to a study by Greenwich Associates, a Greenwich, Conn.-based investment adviser, pension funds were expected to add $38 billion in real estate assets to their portfolios in the three-year period between 1994 and 1997. During this time, their allocation to the asset class will rise to 4.2% from 3.6% of total assets and bring their aggregate investment to more than $132 billion. (The firm's research is not a complete listing of pension fund investment but represents most of the country's large public and corporate funds. The investment figure represents the lion's share of pension fund investment. However, some estimates, like one by Ernst Young, put the figure as high as $170 million.)
"The economy is still in recovery and all sectors are seeing positive absorption," says Greg Kraus, director of acquisitions for Dallas-based L&B Realty Advisors Inc. "Real estate is cheaply priced relative to replacement costs and in relation to the volatile stock market and clobbered bond market."
But, Kraus adds, discipline is the rule of today's pension fund investors. "We've seen some aggressive pricing in which people are buying into appreciation, but people are evaluating each investment on its own attributes and with more sophistication," he says.
L&B Realty, which looks to buy performing properties in the 9% yield range, was one of three pension funds to increase holdings in New York City last year. The firm took title to 595 Madison Avenue in midtown Manhattan. The 90% leased building contains some of the city's most expensive retail space--some of which rents for upwards of $500 per sq. ft.
In September, the $14 billion Retirement Systems of Alabama increased its interest in a lower Manhattan building to 98%. The fund owned 20% of the debt on 55 Water Street when its developer, Olympia & York, went into default three...