The biggest non-sovereign funds in the world are not high-yielding hedge funds run by fast talking deal makers. They are collections of individual’s retirement savings know as pension funds. Since they already have a steady flow of capital and lots of people relying on their stability, these funds are less worried about big returns and more worried about creating a “market neutral” portfolio. In other words, they care more about limiting their risk than maximizing their profits.
Some of these funds are so big that if they start to invest in new asset types they can really drive demand. Pension funds were one of the main investors in the mortgage-backed securities and derivatives that famously threw the world economy into a tailspin in 2008. They can also affect the stock market when they retreat from equities in favor of the guaranteed yield of bonds. Now it looks like they have a newly desired investment category, commercial real estate.
The Wall Street Journal reported on a trend for pension funds lending money on real estate rather than owning outright because of the lower risk associated. They also point to restrictions on banks from the Dodd-Frank act as creating demand for this type of real estate lending. Some think that this monetary infusion could spur over development and could create riskier projects. Others see it as a sign that the commercial real estate sector is at the end of its high-growth cycle.
This trend isn’t isolated to the U.S. Denmarkand Switzerlandboth have pension funds that are pushing hard into real estate. An Australian pension fund is teaming up with a publically traded real estate company to specifically target U.S. real estate assets.
There are many forces behind the decision of these big money players to turn their attention to commercial real estate. One is undoubtedly economic. Seeing the growth of certain real estate markets, specifically the office market in cities with growing tech economies, can give even these risk adverse organizations FOMO. Plus, in a world where stocks are at all-time highs and a trade war seems imminent investing in valuable spaces for companies to work is starting to look like a really safe bet even in an economic downturn.
Another reason might be that technology is making commercial real estate investing more approachable. Having access to analytical tools and aggregated data that was once only possible for the biggest real estate firms must give pension funds a level of certainty about their investments. One of the agreements for a more open data ecosystem in commercial real estate has always been that it can help bring new money to the table. If the recent run of innovation is even partially responsible for these giant funds seeing commercial property as a good long-term investment, the entire industry stands to gain. What we will have to wait and see is if this new money has any unanticipated second and third order effects.