For many investors, the global financial crisis nearly flatlined much of their appetite for risk — especially when eyeing real estate. The years following saw most institutional real estate capital flood the major markets like a tsunami, leaving many secondary markets drying on the line. And even for investors who were more eager to roll the dice, the lack of CMBS in the market meant that finding financing for noncore opportunities was more challenging than it had been in previous years.
In steps 2014. Core buildings cost a fortune, and high-yield debt and CMBS are readily available to finance opportunistic plays. Cap rates for the NCREIF Property Index have fallen every year since 2009. An environment has emerged that has seen many investors turn away from the penny slots — enough for Starwood’s Global Opportunity Fund X to raise $1.3 billion in sixth months and Lone Star’s Fund IX to raise $5.3 billion in two.
Second quarter 2014 saw the Oregon Public Employees Retirement Fund commit $425 million and $300 million to noncore real estate, with Anthony Breault, senior real estate investment officer with Oregon State Treasurer’s office, who invests on behalf of OPERF, saying at the time that:
“We believe the best way to achieve above-market returns is to capture market inefficiencies often found in the private markets for a myriad of reasons, and in this post-GFC recovery market, we have found the ‘flight to quality’ investments highly competitive and often overpriced.”
In March, the Florida State Board of Administration decided to commit up to $600 million to noncore strategies in 2014, and, in June, the $15.6 billion Kentucky Retirement Systems committed $80 million to noncore real estate. David Peden, chief investment officer with KRS, explained at the time:
“We’ve had a difficult time getting comfortable with the valuations in core, so we’ve been adding value-add and a lot of real estate–backed debt in our real estate program.”
Even more recently, at a June 26 board meeting, the $24.2 billion Iowa Public Employees’ Retirement System decided to increase its target allocation to noncore strategies by 15 percent of the real estate portfolio — an increase that represents approximately $290 million of investment.
And this has just been the tip of the iceberg as we’ve seen a number of investors commit heavily to noncore strategies in 2014, enough for a value-add fund like DivcoWest Fund IV to surpass an $888 million fundraising target by nearly $100 million in just eight months.
Sometimes the money you lose out on can be worth more than the money you lose.
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Reg Clodfelter is a reporter with Institutional Real Estate, Inc.
