Pension Funds Hit Hard By Commercial Real Estate Downturn, Impacting Retirement Plans

The commercial real estate sector is facing a trifecta of pain: remote work emptied office buildings, property values suffered and interest rates went up. This crisis is not only affecting banks and property owners but also taking a toll on government pensions that invested in commercial real estate, ultimately impacting average Americans’ retirement plans.

According to data from Wilshire Trust Universe Comparison Service, large U.S. public pensions have lost 6% on their real estate investments in the last 12 months, the most significant loss since the COVID-19 pandemic. The California State Teachers’ Retirement System, for instance, has lost around 9% on its $333 billion real estate portfolio in 2023.

High interest rates spurred by the uptick in inflation under President Joe Biden’s administration have contributed largely to falling commercial property values. Inflation peaked under Biden at 9% in June 2022, since decelerating to 3.4% as of April, far higher than the Federal Reserve’s goal of 2%.

Privately managed funds have also taken a hit, losing 12% in 2023 on their commercial real estate properties, according to data from the National Council of Real Estate Investment. Some funds are still holding on to properties in the hope that the crisis will ease.

The cycle of spillover effects has been dubbed the “urban doom loop,” wherein struggling office districts negatively impact entire cities. This threat to Americans’ pensions comes at a time when retirement costs have skyrocketed due to inflation, with Americans now estimating that they will need $1.46 million saved to comfortably retire, a 15% increase from the previous year.

As the commercial real estate crisis continues to unfold, its effects on average Americans’ retirement plans and the broader economy remain a growing concern for policymakers and investors alike.

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