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Pension funds increase allocations of commercial real estate

California real estate developers might be interested in learning that pension funds have been increasing their allocations of commercial real estate in their overall investment portfolios. While the commercial real estate market appears to be maturing in its cycle, pension funds appear to be on track to maintain their higher profile through 2017.

According to the Pension Real Estate Association, the higher allocations may be attributed to two factors. Commercial real estate investments have become more mainstream as a class of assets. It also has returned consistently good returns. Prequin, a research firm, found that U.S. pension fund allocations have increased from 6.0 percent to 7.3 percent under management. Global pension funds have increased their allocations even higher with current allocations of 8.8 percent.

PREA estimates that the total returns from commercial real estate investments will decline from 8.3 percent in 2016 to 6.8 percent next year. It expects an additional drop in 2018 to 5.7 percent. Since the economic market is one of low yields, investors are still interested in commercial real estate despite the expected declines. The influx of capital from pension funds has pressured the prices and values of commercial real estate. This has led to added interest in value-added properties that will have room for growth if interest rates are increased.

Commercial real estate development is an exciting endeavor, but it can sometimes be risky. Those who are just starting out as well as companies with extensive experience may want to have the assistance of an experienced attorney at the outset. Legal counsel can research the proposed project to see if there are any issues such as easements or zoning that could present a problem. An attorney can also assist in negotiating financing terms.

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