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April 9, 2014

Pension funds appear to have a definite target in mind for their commercial real estate investments in 2014: Not too high and not too low. This year, their allocations seem poised “just right.” And just right—appears to be solidly in the middle of the skyline of U.S. cities. According to JLL’s 2014 Skyline Review, unprecedented foreign capital entering the market and intense competition is driving pension funds to mid-tier buildings and secondary markets. It’s a hot topic at PREA’s 2014 Spring Conference and top of mind to investors as they seek new tactics and strategies for office space allocations.

“While I was at the MIPIM Conference in Cannes last week, this is all we were hearing. International investors continue to make their way into gateway skylines such as Boston, Washington D.C. and New York and aggressively pursue the high-end, trophy assets of the market. We’re also seeing value-conscious space options snapped up quickly,” said Jay Koster, Americas Head of Capital Markets and Investor Services for JLL. “Pension funds are responding to this competition by moving farther along the risk spectrum, allocating funds toward non-trophy assets and non-gateway markets.”

A constrained pipeline of product delivery and repositioning potential keep middle market opportunities abundant for pension funds, especially in larger blocks of office space.
“With enhanced leasing demand and decreasing vacancy rates, even slight value-add enhancements to second and third-generational office buildings provide institutional investors with the types of returns they seek,” said John Sikaitis, Managing Director at JLL. “Office sector fundamentals are essentially beckoning pension funds to the middle market and we anticipate tightening ahead.”

In addition to the mighty middle market of primary markets, pension funds are maintaining yield criteria by setting their sights on secondary markets such as Pittsburgh, Raleigh, Minneapolis and Denver. Sikaitis notes, “Trophy buildings in secondary markets can deliver yields as high as 6.5 percent, providing pension funds with many options for the type of product they seek.”

For more information, please request your copy of the 2014 U.S. Skyline Review.

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