U.S. and Canadian pension funds are souring on office buildings and retail and offloading these property investments as they foresee the potential of significant value declines. The office used to be the preferred real estate asset class for pension funds, but its share of investment has rapidly declined. Office asset holdings now account for 23 percent of private real estate fund holdings, which is down 11 percentage points from 3 years ago, according to data from the National Council of Real Estate Investment Fiduciaries.
Many U.S. and Canadian pension funds predict that the five-day pre-pandemic office workweek won’t return. For example, Michael Turner, president of Oxford Properties, the real estate arm of the Ontario Municipal Employees Retirement System, said he expects the fund’s office investments to fall from 25 percent of its holdings to 20 percent within the next decade. It wasn’t too long ago (six years ago) that office assets accounted for 44 percent of Oxford’s holdings. “On average, hybrid work will likely result in less office demand per employee over time,” Turner said.
Some analysts say remote work could lead to a 20 percent reduction in office space demand, and another report estimated that as much as $500 billion in value could be lost in the office market. In response, it appears pension funds are already shifting their strategies. Office space had returns of just 0.69 percent in the second quarter of 2022, while industrial assets showed strong returns of over 6 percent, according to a Teacher Retirement System of Texas analysis. Office occupancy rates are slightly increasing, but as the pension funds’ shift in strategy shows, there’s enough doubt about the long-term health of the office market right now that some investors are starting to place their bets on other, stronger asset classes.