Published on Wednesday, February 21, 2024

Pensions favored higher-yield, opportunistic plays in 2023.


Pledges to commercial real estate vehicles from U.S. pensions plunged by 50% in 2023 to about $33B, down from $65B the previous year, which was a record.

The tally from commitments to funds and separate accounts last year was the lowest since 2013, when pensions gave less than $28B to CRE and the fourth-lowest total since Ferguson Partners began tracking the sector in 2011, according to a Green Street alert.

The momentum for pledges withered in the second half of 2023, when barely $14B in commitments were made in the third and fourth quarters combined, which is 25% than the quarterly record of nearly $19B in Q3 2022.

The 2023 tally also is 25% than the 10-year average of $44B. According to Scott McIntosh, a director at Chicago-based Ferguson, the cliff-dive in pension commitments to CRE in H2 2023 was a "stark recalibration" from the upward trend in fundraising over the previous five years.

Industrial-property funds attracted the largest share of pledges, 35%, followed by vehicles targeting niche sectors including data centers, life science and SFR, which drew 33%, and multifamily funds at 27%. Vehicles focused on retail drew only 5% of pledged dollars, while office funds drew a scant 1%, the report said.

The 137 managers who secured commitments in 2023 dropped from 173 in 2022 and 165 in 2021. The number of individual commitments fell 49%, to 295 from 578 in 2022 and 497 in 2021. The average commitment size in 2023 was $287 million for separate accounts, down from the record high of $343 million in 2021.

McIntosh attributed the drop to the same litany of headwinds that kept lenders and investors with dry powder on the sidelines as CRE transactions ebbed last year-illiquid markets, falling property values and uncertainty in predicting a turnaround.

"In terms of fundraising, we're probably at the bottom," he told Green Street, adding that pension managers are cautiously optimistic that markets will begin to open up this year. We won't see an immediate rebound or a correction that takes the fundraising total back to the levels seen in 2021 or 2022, McIntosh said.

Only 20% of the pension dollars committed went to core strategies, the lowest annual tally since 2016, and core-plus commitments dropped to 4%, down from 16% two years ago.

Pensions favored higher-yield strategies in 2023, with roughly 76% of commitments in terms of dollar value going to value-added or opportunistic plays, which jumped 57% from the previous year. Investors are eyeing opportunities in distressed assets, the report said.

Closed-end funds garnered 59% of commitments last year, a record share. Separate accounts took in 32% of pledged dollars, about the same amount as in 2022. The share for open-end funds, which usually target lower returns, dropped to 8%.

Pensions also gravitated to the largest players in 2023, with 37% of committed dollars going to the top 10 managers.

Ferguson Partners tracks 308 U.S. public pensions, representing more than $5.5 trillion under management and the vast majority of pension assets under management.