CalPERS Sees Drop in Core Office and Separate Account Urban Portfolio

By Jon Peterson

A long-time real estate partnership between CalPERS and the Hines company has recorded a $276 million drop in value in a single-quarter of 2009.

National Office Partners L.P., formed in 1998 to invest in office buildings, saw the value of its holdings drop from $459.4 million to $183 million in the third quarter of 2009.

Factored into the calculation is the loss of the 814,000 square-foot Watergate office complex and a restaurant in Emeryville. CalPERS and Hines agreed last year to give the asset back to their lender, San Francisco-based Pacific National Bank. The partners owed PNB $152 million. PNB was taken into receivership by the federal government last fall.

More recently, the NOP partnership sold a Maryland office complex for nearly $55 million less than it paid in 2005.

In March 2009, the NOP portfolio had a value of $869 million. At one time the portfolio’s value approached $2 billion, according to the Hines Web site.

Houston-based Hines has a local office in San Francisco and invests primarily on the East Coast and in selected West Coast markets.

The decline in the NOP portfolio was calculated as part of a longer-term, comprehensive review of the entire real estate holdings of the California Public Employees’ Retirement System. The initiative is that of Ted Eliopoulos, who took over as the giant pension fund’s senior investment officer for real estate in January 2007. “There have always been valuations, but nothing as far-reaching as this one,” said Clark McKinley, a CalPERS spokesman.

“We began with the housing portfolio last year, and that was reported in the fall. The core part of the portfolio that includes office, apartments, industrial and retail will be done in late spring. After that we will do the opportunistic part of the portfolio,” McKinley said.

The sectors appraised during the reporting period were the pension fund’s core office-building portfolio and its separate-account investments in its urban portfolio. Together, the two experienced a $653 million drop in value based on independent appraisals. The pension fund’s investment committee is set to review the results Feb. 16.

There were some positives signs for CalPERS in its real estate portfolio during the quarter. The overall value increased from $13.4 billion at the start of June to $13.7 billion by the end of September.