By Jon Peterson
Demand for housing is likely not going to contract in the near to mid-term across the major employment centers across the United States. As a result, a number of institutional-grade investors have been busy raising money from private and public sources to expand their footprint across the industry. One such public investor, the Oregon Public Employees Retirement Fund, recently approved a $250 million commitment into the AEW Essential Housing Fund, according to information provided by the Oregon State Treasury, which oversees the real estate investments made by the pension fund.
This commingled fund has a nationwide investment strategy, although with a strong focus on a number of defined markets for its apartment acquisitions. These include the West Coast metropolitan areas of Northern and Southern California, as well as the Pacific Northwest markets of Seattle and Portland, according to sources familiar with the fund.
AEW Capital Management is the manager of the commingled fund, and the company declined to comment when contacted for this story.
The commitment from Oregon PERF makes the pension fund an anchor investor for the commingled fund, even though the investment vehicle has an open-ended participation structure. Some sources across the industry that follow fundraising across the pension fund universe anticipate AEW’s fund to be at or above the $1 billion level of commitments over the next couple of years.
The essential housing focus for the fund means that investments will be made in apartment assets that are rented by lower to moderate income workers with typically fewer quality housing choices. Some examples of the types of workers in this group include construction, retail trade, food service, teachers, healthcare workers and warehousing employees. These types of tenants are also less likely to move, which means that the properties are usually characterized by very high occupancy and little tenant turnover.
Oregon PERF considers the commingled fund as a core investment. This is based on the fact that the properties will produce sustainable current incomes, while the commingled fund will have leverage of no more than 50 percent.
All of the investments for the commingled fund will be to purchase existing assets, and no development opportunities will be pursued. The return targets for the fund will be a 5 percent on current income and a total return of 7.5 percent to over 8 percent on a long-term basis.