Pension funds "have such an overwhelming presence in the stock market that it is increasingly difficult to outperform the market average. They are the market," according to Stan Ross, co-managing partner of Kenneth Leventhal & Co.
"As a result," the executive of the national CPA and consulting firm specializing in real estate and related financial services continued, "they are looking to diversify into new investments that may provide greater yields."
Although "commercial real estate development is a bold step for traditionally conservative pension funds," they may invest up to $130 billion there in the next decade, making them dominant players in that high-stakes industry, he said.
Ross warned, though, "While the potential rewards of real estate development are great, so are the risks. In order to maximize returns, pension funds will have to wait months and even years to realize profits.
"Most commercial projects will not yield returns until they are completed and fully leased, which may take five to 10 years."
Pension funds are expected to grow significantly during the next 10 years, possibly doubling assets from the present $1.2 trillion to $2.4 trillion by 1995, intensifying pressure to diversify into other investments.
Pension funds currently invest only 3%, or $40 billion, of the $1.2 trillion assets in real estate, most of that in fully leased buildings, Ross noted.
But he expects that by 1995, as much as 10% to 20% of funds may be invested in commercial properties. And he commented that by investing in development projects, pension funds can realize higher revenues than by investing in existing buildings.
Ross warned that, as relative newcomers, pension funds could make the mistake committed by some banks and other lenders in recent years, that of pumping money into unneeded developments simply because investment capital was available.
"Pension fund managers can minimize risk by partnering with strong developers who have good track records and only participating in ventures that are economically sound," he advised.