San Francisco Pension Fund Considers Nearly $600MM Allocation to Bay Area Real Estate

Residential and Commercial Space

Aerial Photograph of San Francisco and The Bay AreaBy Jon Peterson

The $19.8 billion San Francisco Employees’ Retirement System is considering creating a specific allocation to only invest in real estate in the nine counties that make up the San Francisco Bay Area.

The amount being considered is 3 percent of total plan assets or $594 million of equity based on the pension fund’s total plan assets the end of January 2015. The potential investment capability is much more than this once leverage is thrown into the equation.

Santa Monica-based Angeles Investment Advisors, who is acting as San Francisco Employees’ general investment consultant, however feels that the allocation is not a good idea. The consultant stated in a board meeting document that it believes it is disadvantageous to establish an allocation to any geographical area in any asset class, including one as narrow as San Francisco-based real estate.

The consultant also wrote that the pension system should be cautious in approaching San Francisco real estate given lofty valuations for the region and that the fact that the pension fund is already heavily exposed to Bay Area real estate by virtue of its tax base in which local real estate is a major contributor to City and County finances.

According to an e-mail received from San Francisco Employees’ Retirement System, the pension fund’s investment staff is still in the research stage. It still has to go through board approval before any allocation decisions would become a reality.

This potential allocation was first originated as a request from the pension fund’s board president Victor Makras. He is president of San Francisco-based Makras Real Estate that describes itself as a corporation that provides professional real estate service in the San Francisco Bay Area, including sales and property management. Makras’ term on the pension fund board doesn’t expire until February of 2019.

San Francisco Employees has been active in investing in San Francisco real estate through three commingled fund managers over the past year. The pension fund has made an aggregate of $200 million in capital commitments with three managers, CIM Group, DivcoWest and Gaw Capital USA, all of which are actively reviewing and investing in real estate assets in the city.

Both CIM and Gaw Capital have closed on deals in San Francisco over the past year. CIM has bought the 78,169 square foot Phillips Building located at 246 1st Street for $34 million, according to sources familiar with the property and a mixed-use development site located at 100 Channel Street.

Gaw Capital acquired Embarcadero Square, formerly known as Golden Gate Commons. This is a group of office buildings located in the north financial district section of San Francisco.

San Francisco Employees’ stated in a board meeting document that its capital exposure to these three projects is expected to be approximately $25 million.

The pension fund also wrote that there will be additional investment opportunities to invest in San Francisco real estate via its primary commitments to these and other partnerships. In addition, the investor is in discussions with several managers to implement meaningful real estate co-investment programs to both lower expenses and enhance net returns.

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