The ongoing downturn in the commercial real estate sector is not only impacting banks and property owners but also posing a significant threat to average Americans’ retirement plans. Government pensions that invested heavily in commercial real estate are now facing substantial losses, according to a report by The Wall Street Journal.
Data from Wilshire Trust Universe Comparison Service reveals that large U.S. public pensions have lost 6% on their real estate investments in the last 12 months, marking the most significant loss since the COVID-19 pandemic. This crisis is largely attributed to the lack of demand for office space and the high interest rates resulting from measures implemented to combat inflation under President Joe Biden’s administration.
The California State Teachers’ Retirement System, for example, has lost around 9% on its $333 billion real estate portfolio in 2023 amid the commercial real estate downturn. Shawn Quinn, managing director of Wilshire, told the WSJ, “Folks are allocating less dollars, trying to understand what they have in their portfolio. Institutional investors are not quite sure if we’ve hit the bottom yet.”
The crisis in the commercial real estate sector is not limited to government pensions. 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.
The threat to Americans’ pensions comes at a time when retirement costs have skyrocketed due to inflation. Americans now estimate that they will need $1.46 million saved to comfortably retire, a 15% increase from the previous year.
The cycle of spillover effects has been dubbed the “urban doom loop,” wherein struggling office districts negatively impact entire cities. As the commercial real estate crisis continues to unfold, its effects on average Americans’ retirement plans and the broader economy remain a growing concern.
