In a development that could breathe new life into the nation's moribund home construction industry, the California Public Employees' Retirement System said Monday that it would become one of the first public employee pension funds in the country to invest in single-family residential development.
The Board of Administration of CalPERS, which has more than $67 billion in assets and more than 950,000 active members and beneficiaries, voted to start a California Housing Program that will invest about $225 million in the first half of 1992 through limited partnerships with three investment groups: California Housing Advisors, Prudential Realty Group and Wells Fargo Realty Advisors. The board said it will consider additional investments, and expects to allocate additional funding, within the next six months.
"We are excited at the prospect of entering a new, potentially very attractive market, while at the same time possibly helping jump-start California's economy," said DeWitt Bowman, chief investment officer of CalPERS. "There seems to be continuing demand for single-family homes. We don't feel single-family housing has been overbuilt to the extent that commercial real estate has been."
"Other pension funds will follow suit because the investment case for single-family home development is so compelling," said James Z. Pugash, chief financial officer for California Housing Advisors.
The entry of a major public employee pension fund into single-family home building is good news to residential real estate developers who, since the late 1980s, have had difficulty getting construction loans because of the credit crunch.
Although a few private employee pension funds in California have funded single-family residential developments in Riverside, the Laguna West Community of Sacramento and some other areas of the state, CalPERS is said by investment officials to be the first major public employee system to commit substantial amounts of money to single-family home building.
"As recently as two years ago, single-family residential wasn't even included in the investment array" of most pension funds, stated a recent study by the Atlanta-based real estate advisory firm Equitable Real Estate Investment Management Inc. "In 1992, it will be a hot item."
It is unlikely, however, that pension funds will be able to replace the estimated $10-billion shortfall that has developed in California residential real estate since banks and thrifts began curtailing their investment in 1989. Last year, single-family housing starts in California declined to an estimated 73,700 units from a peak of 162,600 in 1989.
What's more, pension funds, which maintain the lion's share of their money in the stock and bond markets, remain less than thrilled by the potential investment returns in residential real estate. Those returns are now less than half the 20% to 30% posted by commercial real estate during the industry's heyday in the early 1980s.
"There just isn't enough capital out there that could be committed," said Michael Evans, national director of real estate advisory services from Ernst & Young in San Francisco, which is preparing a report on residential investment by pension funds.
Nevertheless, the entry of pension funds is heartening to home builders such as Tim Kruer, president of Patrick Construction in San Diego.
"It sounds to me like a positive step; pension funds need to step forward," Kruer said. "If we are going to have any economic recovery at all, housing has to lead us out of the recession. The question is how much pension funds are going to help us."
CalPERS' Bowman said the pension fund, which now has less than 8% of its assets in such real estate as office buildings, shopping centers and apartment buildings, has not yet identified which developers or housing projects it will help finance.
But one of CalPERS' partners, the Prudential Realty Group in Newark, N.J., said it will focus on spreading investment among a diverse group of entry-level home builders in various regions of the state.
"Funds will be made available to qualified builders both public and private," said Claude Zinngrabe, the Prudential Realty executive who is heading up the program. "But this program is focused on the first-time home buyer and the move-up buyer. We will not be pursuing high-end and custom luxury homes."