CalPERS, Hines Take Another Real Estate Hit

By Jon Peterson

The largest public pension fund in the country and a former trailblazer for other U.S. pension funds has sold a Maryland office building for more than $50 million less than what it paid four years ago.

Pennsylvania-based Urdang Capital Management has acquired the 500,000 square-foot Station Square office building in Silver Spring, Md., for $75 million. The California Public Employees’ Retirement System bought the property for $129.8 million in 2005.

The pension fund held the asset in its National Office Partners LP, a joint venture that the pension fund has with Houston-based commercial property developer and manager Hines. Last year, the same investment vehicle relinquished three office buildings and a freestanding restaurant building in Emeryville to their lender.

CalPERS and Hines, which has an office in San Francisco, declined comment for this story.

The Maryland loss is but the latest for CalPERS in its real estate holdings. Last year, the pension fund lost a $100 million investment in a venture that had acquired more than 1,800 apartment units and other properties in East Palo Alto. Lender Wachovia is foreclosing on the properties and they are scheduled for auction at the beginning of next month.

It also has reported a more than $450 million loss in its California Urban Investment Partners fund in the second quarter of 2009, the most recent reporting period available. The fund was originally managed by San Francisco-based MacFarlane Partners, who resigned the account last year; it is now managed by San Francisco’s Stockbridge Real Estate Funds. Then, less than a week ago the pension fund learned definitively that it had lost its entire $500 million investment in the Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan after the property’s real estate manager, Tishman Speyer Properties, decided to give the holding back to  lenders.

Urdang bought the Maryland offices in conjunction with a partner who is very familiar with it: Maryland-based Moore & Associates. Moore developed the complex and sold it to CalPERS in 2005.

“We think that there is a very strong leasing opportunity for the property down the road. The goal for us is to have the property 95 percent occupied over the next 12 to 18 months. This should be reachable when you consider that occupancy rates in the Silver Spring area for Class A office buildings are 93 percent to 94 percent,” said Lloyd Moore, chairman of the company.

Station Square was not a strong performer for the joint venture. At the time the sale closed, it was 87 percent occupied. But the occupancy rate is expected to drop to 80 percent later this year. This kind of performance does not fit a core investment strategy. Core funds typically aim for occupancies above 90 percent.

Urdang bought the property from NOP, a core real estate fund, with a combination of equity and debt, assuming existing financing. The debt term runs into 2013, raising some question as to why CalPERS would sell now, given that its loan retains some term, that property values are at cyclical lows and noting the relatively strong market in the Washington, D.C., metropolitan area.

Sources interviewed for this story speculated that CalPERS knew that it could sell the asset now because the loan was assumable, and the buyer would not have to find financing in today’s unforgiving marketplace. Another factor is that the property had been in CalPERS’ real estate portfolio for nearly five years. This would put it in the middle of the holding periods that pension funds normally favor.

Urdang acquired the property for its commingled fund, Urdang Value-Added Fund II. The manager stopped raising money for the fund in April 2008 with$463 million in equity pledged. One investor in the fund with a $50 million contribution is Los Angeles Fire and Police Pensions.

“This transaction is close to our sweet spot in terms of deal size and strategy,” said David Rabin, Urdang’s managing director of acquisitions. “Normally we look to buy assets that have a combination of debt and equity that totals $60 million. This is a value-added purchase given the leasing opportunity that exists.”

Urdang has a presence in the San Francisco Bay Area. Its Value Fund II has owned an Alameda office building since December 2007. The real estate manager as a company also owns a research and development building in Silicon Valley and land in Santa Rosa that is planned for offices. Both are held for commingled funds or separate accounts that Urdang manages.

Urdang still has a way to go before it places all of its capital for fund II. “We have invested around 50 percent of the equity for the commingled fund. We are seeking assets around the country that have a value-added component.  The property types we are looking at are office, industrial, retail and apartments,” Rabin said.