As of August 19, approximately 8.7% of total assets managed by North American public pension funds are allocated towards real estate, per research firm Preqin Ltd. These pension funds have more than $6 trillion in assets under management.
Commercial real estate, primarily office spaces, used to dominate a conventional pension fund’s portfolio pre-pandemic, as remote and hybrid working was rare. However, most U.S. and Canadian public pension funds are restructuring their real estate portfolio to invest in residential, infrastructure and industrial holdings.
The 9-to-5 office operating five days a week is no longer the norm. Many companies are adopting a hybrid working structure while others are designing a permanent remote working arrangement. With lower overhead costs and surveys indicating improved employee productivity in a remote set-up, companies worldwide are leaning towards remote structures. As such, demand for commercial office spaces is declining rapidly.
Fund managers are increasingly restructuring their real estate investments to factor in this societal change. Private real estate funds have decreased their office space holdings by approximately 10% over the past three years, according to a National Council of Real Estate Investment Fiduciaries index. As many as 40 of the largest public pension funds in the U.S. are focusing on changing their real estate holdings.
In addition, the California State Teachers’ Retirement System fund is restructuring its $312 billion portfolio to substitute office buildings with residential, industrial and infrastructure real estate.
Michael Turner, president of the real estate division of the Ontario Municipal Employees Retirement System, expects office spaces to account for only 20% of the total portfolio within the next 10 years. The restructuring process has already begun, as the fund sold nearly $3 billion worth of commercial office spaces in the U.S. and a tower in Toronto valued at $850 million.
Commercial Real Estate Asset Classes on the Rise
The commercial real estate space is transforming rapidly. While the housing crisis in the U.S. has jacked up the prices of residential properties, the government policies announced over the past year are expected to shape infrastructure and industrial real estate. Though housing demand has been slumping from rising interest rates, median U.S. house prices are still higher than a year ago, as of August. Moreover, multi-family housing building construction took off last month, according to the National Association of Home Builders.
President Biden signed the once-in-a-generation Build Back Better bill, which is poised to modernize American infrastructure. The government has been focusing on improving domestic manufacturing as international tensions run high, which could drive up industrial real estate prices in the U.S.
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