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Institutions Deploy Variety of Tactics to Place Funds

With yields on class-A assets in top markets declining, institutional investors are increasingly employing creative strategies to generate their targeted returns.

The focus on core gateway markets by institutions “came as a result of tremendous issues many pension funds had. The reaction was to move to perceived safety,” said Edward Schwartz, principal with ORG Portfolio Management during a panel at the ICSC/NAIOP Capital Marketplace Conference held last week in New York City.

“I say ‘perceived’ because you see funds going to yields in the low 4s or slightly below and when you go underneath and look at what's being acquired [and it’s hard to justify those cap rates],” Schwartz said. “And there is a concern when going in at low numbers and then assuming growth or cap rates to stay low.”

Alan Forman, the director of investments at the Yale University Investments Office, said the university has tended to shy from those deals in favor of core-plus and value-add opportunities.

“We tend to focus on people that can add value at the real estate level,” Forman said. “That's what we want. It’s where operational expertise makes a difference and financial leverage is lower.”

GE Asset Management, which manages the pension for GE workers, has also modified its investment strategy in recent years.

“During the 1990s we were raising commingled funds,” said Phil Riordan, senior managing director to GE Asset Management. “That business has been set aside. We still have a few funds managed outwards. But I’m glad we’re not out soliciting dollars. It has to be somewhat brutal.”

GE is focusing on managing its real estate and not just passively investing. “Fundamentally, we are real estate investors,” Riordan said. “It’s not that common among corporate pension plans. But we are maintain that allocation to equity real estate.”

Some institutions are beginning to stray and take on more creative investments. For example, Brookfield Real Estate Financial Partners, a subsidiary of Brookfield Asset Management, is now operating a $500 million mezzanine debt fund. It is looking to deploy loans in the range of $30 million to $50 million. And it will be daring to get those deals done. For example, on a recent deal it provided a senior loan and a mezzanine loan on a building in a major CBD. It’s looking to sell the senior piece and retain the mezzanine slice.

“We own buildings in the market so we know it well and we very much believed in the borrower’s business plan,” said Andrea Balkan, managing partner with Brookfield Real Estate Financial Partners.

Meanwhile, Hodes Weill & Associates is investing in gateway cities as a focus, but also has a distressed fund buying loans in the Southeast. Overall, the group is focused on income with its investments.

“We’re hearing from investors how much of returns are from current income,” said Susan Swanezy, partner with Hodes Weill & Associates. “To focus on current income is a return to real estate [and] to its core role in a portfolio. It is income diversification with some equity component.”

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