FROM: Don Pierce, Chief Investment Officer
SUBJECT: Informational: 2025 Real Estate Pacing Plan Update
RECOMMENDATION:
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2025 Real Estate Pacing Plan Update.
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BACKGROUND:
In January 2025, the Board approved a pacing plan of $145 million for Real Estate commitments for the year. The objective of the pacing plan process is to set a pace for deployment to implement the Board approved asset allocation targets over time. Pacing plan recommendations are made annually based on the target weight, actual commitments, current weight in the portfolio, and projected contributions/distributions of existing investments. Since the start of the year, we have identified one fund commitment of $75 million.
Real Estate managers are beginning to express optimism about forward prospects for investment and the market bottoming. The ODCE index was down about -5% annualized for the three-year period ending March 30, 2025. The pricing reset has gotten to a stage where the risk/reward going forward is more compelling. Between 3Q22 and 2Q24 real estate valuations were broadly down about -23%. Specific markets and sectors have been oversupplied while others lack supply as a result of headwinds over recent years (higher interest rates, change in office demand, etc.). We would expect near-term equity opportunities to be more specific rather than broadly regionally defined and debt opportunities to continue to be attractive.
Under our existing MCA, Staff intends to commit $75 million to the Kayne Anderson Real Estate Partners VII Fund. This fund makes equity investments targeting high confidence sectors. About 80% of the fund is expected to be deployed in medical office and student housing and the remaining capital is expected to be invested in senior housing and light industrial properties. The manager believes these sectors are supply constrained but will continue to have strong demand. This fund is a key focus for the firm and Staff has confidence in Kayne’s ability to execute on their strategy. SBCERA has made commitments to the last two funds in this series which have returned net IRRs of 9% and 13% respectively.
Staff intends to bring a proposal to the Board later this year for a commitment to a European real estate debt fund.
The exposure to Real Estate has remained flat at 3.8% of plan assets as of May 2025 relative to the start of the year. The exposure remains below the Board’s approved target of 5% for Real Estate but within the range of 0-10%.
BUDGET IMPACT:
None.
STRATEGIC PLANNING GOAL/OBJECTIVE:
Prudent Fiscal Management
STAFF CONTACT:
Jacob Abbott
ATTACHMENTS:
None.