Why Are Pension Plans Investing in Multifamily Real Estate?
Public pensions invested a record amount in commercial real estate in the first half of 2022, pledging $32.6 billion from January to June, according to data from Green Street Advisors. Of that amount, 27% went to multifamily real estate. In fact, data suggests pension funds have been increasing their investment in real estate for the past several years, but particularly since the end of 2019, according to S&P Global Market Intelligence.
Why This Matters
Public pensions provide retirement funds for roughly 29 million Americans and hold a value of about $4 trillion, according to Pew. Every state has some variety of retiree protections coded into law to ensure workers get their fair share upon retirement. Some states protect a worker’s accrual of benefits, the rate of accrual, or account for cost-of-living adjustments.
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In other words, these funds are legally obligated to pay out a certain amount, depending on the retirees’ agreement, each year. Considering this, in our view, it would make sense for pension fund managers to invest in vehicles that have a reliable history of growing returns while minimizing risk in order to meet with their benchmarks.
As of 2019, most state pension funds had at least 65% of their assets in stocks and alternative investments such as private equity and real estate, again according to Pew. Since the 60s, the percentage of fund allocations in fixed income and cash has shrunk, with pension funds opting for assets that diversify their portfolios and are likely to achieve return targets.
Investment in multifamily real estate specifically hit $14.5 billion in April of 2022, according to S&P Global Market Intelligence — an increase of 47.2% since the end of 2019 and the highest of any type of commercial real estate. Investment in industrial real estate more than doubled in that same time period to $13.83 billion, as of April 2022.
Why Multifamily
We believe multifamily real estate has drawn investor interest because it has historically served as a hedge against inflation, and a CONTI Capital analysis of CoStar data demonstrates that multifamily has historically performed well during economic downturns as compared with the other major commercial real estate (CRE) types.
In CONTI’s view, it’s significant that multifamily is a needs-based CRE type — people will always need a place to live. Our own strategy for acquiring assets keeps us focused on those geographic areas where indicators (e.g., population growth, income level, etc.) suggest there will be strong demand for multifamily housing in the three to five years — our target hold period.
The Bottom Line
Public pension funds are increasing their investment in real estate, and multifamily real estate in particular, which we see as a vote of confidence in this asset type.