Home Commercial CalSTRS Preparing for Real Estate Write-Downs As Economic Outlook Remains Uncertain

CalSTRS Preparing for Real Estate Write-Downs As Economic Outlook Remains Uncertain

CalSTRS, California State Teachers’ Retirement System
Photo by Sean Pollock on Unsplash

By The Registry Staff

The California State Teachers’ Retirement System (CalSTRS), one of the largest public pension plans in the US, is preparing for a possible write-down of its $52 billion real estate portfolio due to recent turmoil in the banking sector and higher interest rates, according to a recent report by the Financial Times. CalSTRS had invested more heavily in real estate in recent years to diversify away from stocks and bonds and benefit from higher returns on private assets. However, the Federal Reserve’s rapid monetary tightening over the past year has knocked valuations in the sector, leading to a potential negative year or two for the industry.

Office properties and the continued shift in their utilization have become a significant worry for the global real estate market due to the combined impact of rising rates, hybrid working, and the need to upgrade energy efficiency. US office values could see peak-to-trough falls of about 30 percent, while prices in the worst-hit cities like San Francisco could halve, according to an analysis by Capital Economics. Real estate is generally slower to reprice than other assets because it is relatively illiquid, and the lack of transactions over the last couple of years has made the business of valuing a property more difficult.

Despite real estate being one of CalSTRS’ best-performing asset classes over the past decade, providing double-digit returns, it reported an overall 6.7 percent loss across its entire portfolio in 2022, a year that saw both bond and stock markets suffering heavy losses. Real estate makes up 17 percent of CalSTRS’ overall assets, including numerous investments reported by The Registry over the years.

The financial industry has been buoyed by the broader hardiness of private asset markets while publicly traded equities and bonds toppled over the last twelve months, but this has sparked criticism of the private equity industry for not accurately valuing its holdings. Predictions of heavy declines as prices catch up with reality have also emerged, stated the Financial Times report.

CalSTRS’ chief investment officer, Christopher Ailman, remains cautious about the real estate market’s outlook, partly because he sees some risk of a possible downturn for the US economy in the near term. However, the fund is a long-term investor and will avoid selling property assets into a falling market, instead holding on to long-term leases and solid debt financing to continue receiving income despite fluctuations in value.