Head of the Class: Teachers Retirement Fund TIAA-CREF Making Waves in New York

Though not a traditional owner-operator, TIAA-CREF has begun to draw the attention of the real estate industry in recent months for a bevy of deals, including its acquisition of a stake in the Frank Gehry-designed building at 8 Spruce Street and a joint venture with Norges Bank Investment Management.

The asset management firm’s steady persistence in the real estate market during the downturn has led to a realization of gains, and recent deals could lead to the redeployment of capital in key markets going forward, said analysts familiar with the firm’s strategy going into 2013.

“TIAA is one of the investors that was pretty active in the depths of the market in 2009 and 2010, and some of those investments have turned into significant home runs,” said Dan Fasulo, managing director and head of research at Real Capital Analytics.

8SpruceStreetThe most conspicuous among TIAA-CREF’s recent real estate deals occurred in December, when the firm snatched a headline-grabbing 49 percent stake in 8 Spruce Street, otherwise known as New York by Gehry, for a reported $250 million. With that investment, the building, and in turn the firm, made history for its valuation of $1.05 billion, the largest ever for a U.S. residential property.

Despite any risks such milestones suggest—and for a retirement fund that counts 3.7 million clients, the risks are enormous—real estate analysts and TIAA-CREF officials described the firm’s real estate strategy, which deploys capital across residential and commercial properties in major metropolitan cities, as disciplined.

“We don’t look at 8 Spruce Street as a risk play,” said Philip McAndrews, managing director and head of real estate transactions and joint ventures at TIAA-CREF. “A risk play would have been developing from the ground up with no leasing and no indication of where rents would be.”

Traditionally viewed as a national retirement fund for teachers, TIAA-CREF has evolved dramatically since its inception 95 years ago, when it was created through an initial $1 million gift by the Carnegie Foundation. Launched as a pension system for professors under the moniker Teachers Insurance and Annuity Association, it grew from a firm with just $19 million in 1929, just as the Great Depression was setting in, to $105 million in assets in 1939, according to records.

In 1995, TIAA-CREF launched its first-ever real estate account with a strategy of investing between 70 percent and 85 percent of its assets directly into real estate or real estate-related securities. Today, the firm boasts a total of $502 billion in assets under management, $33 billion of which is made up of real estate investments and $19 billion is direct real estate equity.

“We are an asset management firm, meaning we are running real estate investment assets for our own benefit and also for third-party clients,” said Mr. McAndrews in an interview with The Commercial Observer. “The view of us as a pension has evolved to being an asset manager.”

However, with the responsibility of managing the retirement funds of many of the country’s academic and medical professionals, risk management is an important part of TIAA-CREF’s investment philosophy, and real estate investments are not always resounding successes for retirement funds.

Among the most dramatic failings in the world of retirement fund managers involved Stuyvesant Town and Peter Cooper Village, a large residential complex on the East Side of Manhattan that was handed over to creditors in 2010, four years after it was acquired by Tishman Speyer and BlackRock’s real estate unit for $5.4 billion, the largest deal of its type in U.S. history. California pension giant CalPERS lost the $500 million it invested in the deal, while CalSTRS lost a further $100 million.

At the time, it looked like a sound investment,” Clark McKinley, a spokesman for CalPERS, told The New York Times in 2010. “When the market tanked, we got caught.”

As reported by Bloomberg, CalPERS instituted a new policy stating that the fund cannot invest in projects that would eliminate rent-controlled apartments or convert them to market rate.

The deal at 8 Spruce Street was completed with original partners Forest City Ratner and National Real Estate Advisors in a transaction that allowed them to retain 26 and 25 percent shares in the property, respectively. It was because of TIAA-CREF’s increasingly well-known reputation as a long-term institutional investor that Forest City and NREA agreed to the terms.

“[They] know real estate and are the pre-eminent long-term institutional investor for an iconic asset like New York by Gehry,” said Susi Yu, senior vice president of residential development at Forest City Ratner. “TIAA-CREF has wisely noted the continued growth of Manhattan rental rates, the strength of the city’s economy and the volume of rental sales transactions, all of which prove that New York City rental developments are the best type for investment.”

As executives were finalizing the 8 Spruce Street transaction in December, TIAA-CREF was also in the midst of acquiring a 70 percent stake in MiMA, a mixed-use building with over 800 apartment units and approximately 18,000 square feet of retail space, for nearly $550 million.

It was yet another signal that while the firm has historically focused on commercial properties, it has found comfort in casting a wider net across residential properties. “We’ve had an interest in the apartment sector, but the opportunity is infrequent,” Mr. McAndrews said.

Still, even as TIAA-CREF eyes big investment opportunities across Manhattan, executives at the firm have steadily balanced the budget by unloading key properties, a strategy that Mr. McAndrews said will allow the firm to invest elsewhere across the New York City metropolitan area.

Indeed, earlier this month, the firm sold a 49.9 percent interest in a $1.2 billion real estate portfolio composed of assets in New York, Washington, D.C., and Boston to Norges Bank Investment Management, manager of the Norwegian Government Pension Fund – Global. As part of the deal, TIAA-CREF will manage the buildings.

The portfolio deal includes the sale of 470 Park Avenue South and 475 Fifth Avenue, among other buildings in the region.

TIAA-CREF sold more real estate properties in 2012 than in previous years, according to data from Real Capital Analytics. “In my mind, that tells me they are keeping an eye on the cycle and where values are,” said Mr. Fasulo. “As value levels continue to increase, TIAA is likely to look at their real estate investment gains and recycle the capital in other areas.”

“You want to sell when you have gains locked in an asset and you want to realize them for your constituents,” Mr. Fasulo added. “This deal is great. You get to take chips off the table and still remain invested.”

Executives at TIAA-CREF believe real estate markets in Washington, D.C., Boston and New York are strong and will continue to be fertile ground for future acquisitions. Market analysis indicates New York is both a growing and diversified economy, said Mr. McAndrews.

“When we are looking at New York, it’s important to understand New York is gateway city,” said Mr. McAndrews. “It has strategic importance from a U.S. perspective and a global perspective.”

The deal with Norges Bank is beneficial in many ways, not least of which is the fund’s similar investment philosophy. “The Norwegians won’t make a phone call and say ‘I want my money back,’” Mr. Fasulo said.

Perhaps most interesting among the transaction’s components is the property at 475 Fifth Avenue. “It’s very much a transitional asset; it was basically bought as a vacant building, and they’re in the process of refurbishing it,” Mr. Fasulo said. “Understanding how they valued that property will be interesting—that might be the upside for Norges in the entire deal.”

Experts indicated that Norges Bank likely did not have the ability to take a full interest in the U.S. properties. “It’s not always fun being a foreign investor in this country,” Mr. Fasulo said.

TIAA-CREF has a history of working with other sovereign wealth funds, including APG of the Netherlands and the Future Fund of Australia. “Our asset management business includes other sovereign wealth clients, which was important to Norges,” Mr. McAndrews said.

“Based on the size and girth of TIAA-CREF and the years and tenure of expertise, these sovereign wealth clients have gravitated toward us in a large way,” Mr. McAndrews added.

With negative interest rates on offer for U.S. government bonds, funds cannot meet their obligations by simply buying traditional conservative assets. For that reason, more pension and insurance money has come into the real estate and equity markets.

The low rate environment is an issue impacting the entire insurance and pension industry, said Stefan Kahandaliyanage, an analyst at Moody’s.

“Real estate has, in the mind of pension funds, become a relative value play in comparison to some of the other investment types, especially when you consider that these pension funds have a mandate to deliver yield on an annual basis,” said Mr. Fasulo.

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