Pension funds invest in real estate so they can provide higher yields to their investors. Most of these investors are retirees living on a fixed income, making high, consistent yields even more important. Many real estate investments provide higher-than-average yields and act as a hedge against inflation.
While there are many real estate sectors, these companies have invested over $12 billion each into the below areas. Some reasons behind this include higher demand, discounted properties and low tenant vacancies.
Throughout the nation, home prices and rents have skyrocketed. For example, the median U.S. home price increased from $362,315 in 2021 to $410,000 in 2022. Many popular markets, especially in the sunbelt, are seeing record growth rates as well.
Multifamily properties are considered to be recession proof because everyone needs a place to live. This also provides another benefit, which is low tenant turnover.
These properties are easier to maintain because the units are close to each other. Many multifamily investors hire a property manager to repair and maintain the property. Having this convenience not only lowers costs, it also makes it easier to respond to and prevent emergencies.
You might have not been expecting to see office space on this list. Despite the aftermath of the COVID-19 pandemic, office space is still in demand. Because of vaccines and other factors, many employers are requiring employees to come back to the office at least part time.
However, office spaces no longer have tight cubicles like they did in the past. Instead, many office spaces are open with unassigned desks, separate meeting rooms and more advanced technology, including higher-speed internet, self-sterilizing surfaces and a single remote to control multiple screens in various rooms.
Office spaces are changing, with many real estate investors seeing quality office properties trading at a discount. For example, Boston Properties BXP is a real estate investment trust (REIT) that specializes in developing and owning Class A office space. During June 2020, this REIT was trading at $80.30, but it’s currently trading at $106.7, representing a 32% growth rate.
Industrial space is seeing higher demand because of the rise of e-commerce. After all, Amazon.com Inc. AMZN warehouses can be found throughout the nation and the company hired 350,000 warehouse workers in three months during the pandemic.
It’s also predicted that the U.S will need at least 1 billion additional square feet of warehouse space by 2025 to keep up with the fast-growing e-commerce demand. Amazon and other e-commerce centers are also responsible for 40% of industrial property leases. Many traditional brick and mortar stores are also investing more into their online marketplaces, increasing demand for these fulfillment centers.
Like multifamily real estate tenants, industrial tenants are usually around for the long run. Many businesses don’t relocate often and sign long term leases for these industrial spaces, providing steady cash flow.
Being a pensioner on a fixed income isn't easy, especially because of low yields and high inflation. So, many pension funds are turning to real estate to generate additional yield and hedge against ever-rising inflation.
These are a few key reasons that pension funds have invested over $12 billion each into multifamily, office and industrial real estate sectors. Each of these areas has unique advantages, including rising demand and tenant stability.
Individuals can also invest directly in private equity real estate deals. Browse current offerings on Benzinga’s Alternative Investments Hub.
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