On Sept. 14, 1960, President Dwight D. Eisenhower took pen in hand and signed the Cigar Excise Tax Extension, formally creating real estate investment trusts, known by the acronym REITs. The intention of Ike and Congress was to give all investors, large and small, the opportunity to invest in portfolios of commercial real estate. Individual investors liked the idea, but it took pension funds almost 30 years to get enthused about publicly traded stocks.
From the Current Issue
We are pleased to announce several updates and changes to our global service offerings.
The pension fund’s long-term evolution to defined contribution (DC) plans from defined benefit (DB) plans has profound implications for the commercial real estate market. DB plans, where employers guarantee fixed retirement income to employees, have been ceding ground to DC plans since the 1970s. Under DC plans, employees assume responsibility for making contributions and bear the risk of meeting their income replacement goals for retirement. With $3.8 trillion of total assets under management, they have already outstripped DB plans, and DC plans are expected to grow to $7.7 trillion by 2020, according to Casey Quirk & Associates.
Institutional investors regularly tell us what a difficult time they have finding good investment management firms. What they really mean is that they are having a difficult time finding good managers who understand what it means to be a good service provider.
Being the best at what you do is listed as the most common goal for Fortune 500 companies, the U.S. military branches and every sports team you ever rooted for. At the Teacher Retirement System of Texas (TRS) we have applied this same goal to all we do. We are a $112 billion fund located in quiet Austin, Texas (except on Formula 1 weekend).
In a lot of ways, the current global economy feels like the beginning of the third act in a three-act story. In many movies, the filmmaker uses a three-act structure where the first act introduces the characters and puts the story into motion; conflicts are established, paths are determined and sides are chosen. The second act is where the drama occurs and culminates with the greatest challenge for the protagonists. This sets up the third act for a resolution. That feels like where we’re at now.
The construction and management of real estate portfolios is not what it used to be. Investors face conflicting forces that must be taken into account.
By some people’s estimation, Mexico was turning into a failed state, driven to the precipice by powerful cartels waging a seemingly endless drug war. That led some to believe the U.S. border state was nearing a tipping point. If so, the ramifications for Mexican real estate investments, as well as for U.S. real estate along the extensive Mexican border, would be significant. But a lot has changed in a few years.
Randy likes to sit on his porch overlooking his frozen lake as snow approaches from the mountains to the west. A flock of geese land on the snow-covered ice. The ice breaks and rows of geese, quite unaware of the hidden risks, cascade into the chilly water. We sense a teaching moment. Not surprisingly, but perhaps incongruously, we recall the words of the infamous and humorous Donald Rumsfeld, former U.S. Secretary of Defense, who once spoke volubly on the absence of evidence linking the supply of weapons of mass destruction to the star-crossed war in Iraq: