Pension Funds look back into Real Estate to shore up investments…

As Values Decline, Pension Funds Jump Into Real Estate

NEW YORK — The Queens Center Mall doesn’t seem to have followed the dour shopping-center story line of this recession.

Sales per square foot actually ticked up in 2008 to $876, and year-end occupancy stood at 97.5%. In the food court, 20-year-old shopper Mario Ontaneda, wearing a cap and jeans he purchased from stores in the mall, said: “I need to save up, but I’m constantly buying stuff.”

The strong performance of Queens Center Mall, located in New York’s borough of Queens, helps to explain why Cadillac Fairview Corp. agreed to pay $150 million and to assume $167 million in mortgage debt to acquire a 49% stake in the mall last week. Cadillac is owned by the Ontario Teachers’ Pension Plan. Macerich Co., the Santa Monica, Calif., real-estate investment trust, sold a stake in the one-million-square-foot mall as part of a broader plan to reduce debt.

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Anton Troianovski/The Wall Street JournalCadillac Fairview acquired a 49% stake in the Queens Center Mall in New York for $150 million.

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The deal is among a few early signs that pension funds, a huge source of real-estate capital, are looking at new property investments even as they lick their wounds from past deals.

A day after the Queens Center deal was announced, the California Public Employees’ Retirement System said it had closed a $463 million deal to buy a stake in 86 shopping centers around the U.S. from Macquarie CountryWide Trust of Australia.

Queens Center was Cadillac’s first U.S. real-estate purchase since 1999. The company owns about $15 billion of mostly malls and office buildings in Canada, the U.S. and elsewhere.

“We’ve looked at, literally, billions of dollars worth of transactions and bid on several of them, but we haven’t been successful from a pricing perspective for a long time,” Cadillac Vice President of Investments Andrea Stephen said in an interview.

As property values fall, investors around the world are starting to pay attention to the U.S. market. Macerich said it expects to close two more joint ventures in the next two months as the publicly traded real-estate investment trust tries to reduce its $7.9 billion debt load. Chief Executive Art Coppola said in a conference call on Tuesday that a big U.S. pension fund and an international sovereign-wealth fund are the lead contenders to join those ventures.

Dropping property values and rising stock markets also are giving institutional investors like Cadillac Fairview more flexibility in making new real-estate investments. In the wake of the stock-market crisis last fall, many institutional investors were trying to reduce their exposure to real estate because of the “denominator effect.” With equity portfolios losing value, and appraisers slow to mark down commercial property, some pension funds and college endowments found themselves with more real estate on their books than the percentage approved by their boards. Now, with stocks up and real estate down, that balance is starting to move back in line.

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“Deals that make sense are pretty few and far between,” said Martin Rosenberg of real-estate investment consultant Townsend Group. But “with the denominator effect abating, a lot of investors are working to find targeted ways to put capital to work today and to position capital to be deployed quickly as pressure on sellers continues to build.”

The danger is moving too soon. Few commercial real-estate transactions are getting done, not only because they are hard to finance but also because it is unclear how much further the market will fall. Before last week’s transactions, there had been only three retail deals of more than $100 million this year, according to research firm Real Capital Analytics. By this time in 2008, there had been 15 such deals.

Analysts said Macerich got a decent price, selling the stake in Queens Center to longtime partner Cadillac Fairview at a capitalization rate just over 7%. Real-estate participants have been warning that the cap rate — annual net income divided by purchase price, a measure of how the market values real estate — could hit double digits for some properties as distressed landlords are forced to sell.

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