By Erik Sherman
The Ontario Teachers’ Pension Fund has owned major North American property developer Cadillac Fairview Corp. since 1999, when it bought the firm for CAN$2.3 billion. But there’s been an ongoing change this year in the management of the $40 billion in real estate assets. A goal to hit a total cross-portfolio asset value of $300 billion by 2030 expects more from the category.
Ontario Teachers’ announced back in June that it would create an in-house real estate asset class group, similar to the approach it uses for other asset groups, “where investment capabilities are embedded to enable information sharing, co-sourcing, and best practices across its global platform.” The strategic shift reflects a broader move across Canadian pensions and how they manage their real estate investments.
To that end, Ontario Teachers’ announced that it bring in-house “CF’s global team of 37 real estate investment professionals to the organization and will conduct a search for a Global Head of Real Estate, to lead Ontario Teachers’ real estate group.”
Additionally, in February 2023, Cadillac Fairview bought the outstanding portion of Lincoln Property Co.’s former residential division, now called Willow Bridge Property Co., to manage properties. Willow Bridge currently independently operates 180,000 residential units and oversees more than $3 billion in owned assets under management. The firm has 4,500 employees across 75 markets and has an active development and investment pipeline.
“We’re starting to see this as a little bit of a trend,” says Peter Altobelli, vice president of sales and general manager at the Canadian division of Yardi Systems, which has software for real estate management. “I think in 2024 you’re going to start seeing [more] changes occur. We’re starting to see some of this with the big insurance companies as well.”
The biggest reason might come down to the uncertainty in the commercial real estate markets. Valuations and transactions have dropped sharply, there is little coherent price discovery, and still-high interest rates coupled with lenders’ wariness make refinancing difficult.
Institutions that have large stable holdings need to look at better and more efficient operations and management if they’re going to improve returns.
There are multiple reasons a large investor in real estate might look to a separate professional property management company. Focus would allow them to hire and develop the expertise in how to make commercial real estate work more profitably.
“By bringing the property management in-house, the pension fund should be making the actual management, maintenance, and governance of the properties more efficient and if desired, more in line with greater social and impact investment priorities,” says Michael Ashley Schulman, founding partner and chief investment officer at multifamily wealth management firm Running Point Capital Advisers. “Similar to many other industries, having a captive service provider, like a property manager, can not only provide direct cost savings by removing imbedded layers of salary, but sometimes even more importantly can provide significant insights into costs and direct market knowledge which not only can be applied to other properties, but can also allow direct oversight to avoid any possible problems with legal compliance, tenant selection, and rent collection.”
Schulman also noted that direct control can allow a pension fund or other large investors to create “true direct social impact and societal improvement increase tremendously if they not only own select properties but can also directly control their operation and management.”
Ontario Teachers’, for example, notes that it has achieved a 56% in greenhouse gas emissions since 2008 in its properties, with 93% of its Canadian portfolio having a green building certification.
Pension fund Caisse de dépôt et placement du Québec (CDPQ) has a real estate portfolio of $47.6 billion as of December 31, 2022 — 11.9% of its total portfolio — with an interest in 1,500 properties. “Our Real Estate portfolio includes the activities of Ivanhoé Cambridge, a global real estate leader,” they wrote at the time.
In 2021, Ivanhoé Cambridge transferred to real estate giant JLL the operations of its list of Canadian shopping malls. Altobelli said that it allowed the company to focus more on managing investments and not losing focus by having to operate the properties themselves.
There is no single answer in terms of structure for all the pension funds investing in real estate. Some bring more in-house. Others do the opposite. Behind it all is the need to find ways to improve the returns on investments.
It might take a while to see what wins and loses in the market, says Altobelli. “It’s hard to predict,” he says. “They’re into a five-to-seven-year cycle. They’re seeing if this is a better model for some of the organizations. If they get the yields and returns they want, they’ll keep the model.” If not, they might wait for the next swing of the pendulum and move back to what they did.
