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CalPERS New $1.5B Commitment to be Partially Invested in San Francisco and Seattle

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Technology, HomeUnion, Puget Sound, Downtown Seattle

By Jon Peterson

California Public Employees Retirement System is planning to invest in office building transactions in the San Francisco and Seattle markets going forward as a result of new $1.5 billion commitment made into the Fifth Street Properties partnership with Los Angeles-based CommonWealth Partners.

The vast majority of the deals for the partnership will be the investment of core office buildings in either central business district or suburban locations. This strategy should make up roughly 85 percent of the partnership. The remaining part of the investment mandate will be the investment in value-added assets. This would be buying existing assets that typically have a vacancy issue or need a renovation and new development projects.

According to its Web site, CommonWealth Partners owns four assets in the greater San Francisco Bay Area and three properties in Seattle. The properties in the Bay Area are 560 Mission in San Francisco, Sunnyvale Office Park in Sunnyvale and two assets in Palo Alto located at 650 Page Mill Road and 975 California Avenue.

The manager owns properties in both Seattle and Bellevue, as well. The Seattle assets are Russell Investments Center and Safeco Plaza. The Bellevue complex is the City Center Plaza.

Fifth Street Properties is a national investment partnership for office buildings. It wants to buy properties for the most part on the East and West Coasts. The other markets besides San Francisco and Seattle would include Los Angeles, San Diego, Boston and Washington, D.C. The capital is less likely to be invested in markets like Chicago, Austin or Salt Lake City.

CommonWealth Partners in many situations will be investing in the office acquisitions with cash. The leverage component on the portfolio is usually in the range of 45 percent. The real estate manager has full investment discretion on the partnership. It will make the final decision on specific transactions on its own without any approval coming from the pension fund.

The new commitment to Fifth Street Properties represents a strong example of how CalPERS wants to invest in real estate going forward. The pension fund desires to have relationships with fewer managers and make larger commitments to these managers.

The investment strategy for Fifth Street Properties also falls in line with what CalPERS wants to do in real estate from a risk perspective. On a long-term basis, the pension fund seeks to have 75 percent of its real estate portfolio invested in income producing property types of mostly office, industrial, retail and apartments.