The Wall Street Journal has reported a significant blow to government pensions invested in commercial real estate, a crisis that is jeopardizing the retirement plans of average Americans.
Data from Wilshire Trust Universe Comparison Service, obtained by the WSJ, reveals that large U.S. public pensions have suffered a 6% loss on real estate investments in the past year. This marks the most significant loss since the onset of the COVID-19 pandemic. The losses are symptomatic of a wider crisis in commercial real estate, triggered by a combination of dwindling demand and exorbitant interest rates. These conditions are a direct result of measures implemented to counter the persistent inflation under President Joe Biden's administration.
Shawn Quinn, managing director of Wilshire, told the WSJ, "Folks are allocating less dollars, trying to understand what they have in their portfolio. Institutional investors are not quite sure if weve hit the bottom yet.
The California State Teachers Retirement System, for instance, experienced approximately a 9% loss on its $333 billion real estate portfolio in 2023, amidst the commercial real estate downturn. The WSJ attributes this largely to the high rates spurred by the inflation surge under Biden, which have significantly impacted commercial property values.
Inflation reached a peak of 9% in June 2022 under Biden's administration, and although it has since slowed to 3.4% as of April, it remains considerably above the Federal Reserve's 2% target. In response to the inflation surge, the Federal Reserve has increased its federal funds rate to a range between 5.25% and 5.50%, thereby escalating the cost of credit crucial to developers.
The value of commercial real estate properties is also declining due to a decrease in demand for office spaces, a trend that has not recovered since the increase in work-from-home policies during the COVID-19 pandemic. In April, the number of office buildings facing default reached its highest since the last quarter of 2012, with approximately $38 billion worth of buildings in financial distress.
Private funds have not been spared either, with a 12% loss in 2023 on their commercial real estate properties, according to data from the National Council of Real Estate Investment obtained by the WSJ. Some funds, such as the California Public Employees Retirement System, are still clinging to properties in the hope that the crisis will abate. They have not yet divested from an office tower in Manhattan valued at $917 million, a 12% decrease from its purchase price in 2016.
This threat to American pensions comes at a time when retirement costs are soaring due to inflation. Americans now estimate that they will need $1.46 million to retire comfortably, a 15% increase from the previous year's estimate.
Login