The New York City investment market remains an arena that many of the large pension funds want to invest in, but have some difficulty finding the deals. One of the main reasons for this is the market attracts just about every capital source known to mankind. This includes pension funds, REITs, foreign investors and private capital buyers. The end result is that properties become very pricey and makes finding and closing a deal very challenging. There are some pension funds that have chosen not to invest in this market. A major reason for this is that the deals in New York City are just too large for their investment parameters.

The main property types that most pension funds are seeking in New York City are office buildings, residential and mixed-use projects. Among these assets are large downtown office buildings, apartments and condominiums for residential and mixed-use properties.

California Public Employees Retirement System (CalPERS) has been interested in investing in New York City for a long time. The property types that it looks at are office buildings, apartments and mixed-use projects. But it has not been able to close on an office building in the market in recent times. Portfolio manager Bob Eberhardt said, “We own no office buildings in New York City at this time. It hasn’t happened from a lack of trying. We have made some offers on some deals this year, but we didn’t get them. Part of the problem is that in New York City you really need to be sure about the property you acquire because of the size of the asset. Deals can be anywhere from $200 million to $1bn. To be wrong about a transaction this big can really have a big negative impact on your portfolio. We are seeing cap rates on these deals at around 5%.” The pension fund has both of its office building managers, Hines and CommonWealth Partners, looking for deals in New York City.

CalPERS does have an active programme in mixed-use projects in New York City. This is through the California Urban Investment Partners Program managed by MacFarlane Partners. The person running this program for the real estate manager is managing principal Chuck Berman.

He said: “The demographics for New York City are very strong. There are significant barriers to entry as there is limited space for new development. There is international demand for tenants going into properties. The infrastructure for projects is already in place. We expect that these factors in the marketplace won’t be changing on a near- or long-term basis.”

There was a recent transaction that MacFarlane closed on. This involves a mixed-use development in Manhattan at 125th and Park Avenue. It’s right near a train station.

The project is now in the design development stage. The project will include a mixture of office buildings, retail and some residential units. The total size of the project is around 750,000 s.f. (69,700 sqm).The parcel for the project is now a surface parking lot. CalPERS is developing the property along with its development partner, Vornado Realty Trust.

California State Teachers Retirement System is a pension fund that looks to invest in apartments in New York City. The pension fund is trying to find some transactions in this market for its BlackRock Cal I, LLC venture. The real estate manager in this relationship is BlackRock Realty. The pension fund earlier this year committed an additional $300 million of equity to the venture. Following an initial investment $100m to the programme in March of 2005.

The investment strategy for BlackRock Cal I is a value-added one. This is to develop new apartment complexes or buy existing properties that it can improve. It looks for properties that can deliver leverage IRRs of at least 13%. This yield assumes a holding period that typically runs from three to four years. The complexes can be either urban or suburban based.

The New York City investment market has deal sizes that put some pension funds out of the market. One of these is the Sacramento County Employees Retirement System. Its chief investment officer Jeff States said: “Our normal deal sizes just doesn’t allow us to be able to compete for office building deals in the market. We are mostly looking for properties to purchase that are in the neighborhood of $25 million to $40 million. It would be very hard for us to find an office building in New York City of this size that would fit the rest of our acquisition requirements.”

The pension fund is looking at office buildings to round out its direct real estate investment program. It now has 21.5% of its real estate assets in office buildings. This is well below the NCREIF ideal of 38%. Sacramento County has Cornerstone Real Estate Advisers and BlackRock Realty as its two separate account real estate managers.

Jon Peterson