Our country’s recent economic downturn all but eviscerated the development of high-end building projects. Financial institutions and lenders began avoiding risky investments, as opportunities for monetary compensation grew thin. However, new trends within the real estate industry have encouraged the development of riskier projects. Thanks in part to a resurgence of “so-called” opportunity real estate funds; developers are once again finding themselves able to construct elaborate, high-cost establishments.
Otherwise known as private-equity funds, opportunity real estate funds specialize in those transactions synonymous with high risk/high reward. They provide developers the opportunity to build elaborate buildings with the potential for huge returns. Through their acquisition, investors are able to facilitate the development of half-empty office buildings, distressed properties burdened by debt, or high priced construction projects requiring the help of excessive funds.
Opportunity real estate funds all but disappeared during the recession, as their source (big pension funds) was already compromised from previous transgressions. Investors simply couldn’t afford to take the risks associated with such lavish spending.
The California Public Employees’ Retirement System is a perfect example of the risk associated with such a fund. Recognized as the largest U.S. public fund with a net worth of $263 billion, this company provides retirement and health benefits to more than 1.6 million public employees, retirees, and their families. However, the economic downturn resulted in a loss of approximately $10 billion for the organization between July 2008 and June 2009.
In light of the recession, a majority of pension funds avoided risky investments. They began to focus their efforts on safe, well-leased properties in flourishing markets. However, the shift from risk mitigation to stable property investment proved more difficult than originally anticipated. Investors were finding it hard to generate returns in excess of liabilities.
Trends are now witnessing a revitalization of opportunity real estate funds.
With what appears to be the worst behind us, pension funds are attempting to make a comeback. At a time when interest rates are at record lows, investors are trying to reestablish opportunity real estate funds to take advantage of potentially lucrative deals. Low interest rates have been projected to provide investors with annual returns as high as 20 percent.
“Many prices have fallen quite a bit, so there’s now a lot of opportunity,” says Edward Schwartz, a principal at real-estate consultant ORG Portfolio Management.
According to Preqin, the next year will see approximately half of all pension funds and other large investors allocating to real estate expect to commit their assets to opportunity funds.
