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Pension funds not put off by CRE warning signs

Institutional investors like insurance companies and hedge funds are major players in the commercial real estate sector in Maryland and around the country, and pension funds have been particularly bullish in the past several years. The market's financial giants tend to become far more cautious when commercial property prices come under pressure, but a Pension Real Estate Association representative has stated that pension funds are expected to continue buying well into 2017 despite signs indicating that the market may be maturing.

Commercial real estate now accounts for about 7.3 percent of the assets managed by U.S. pension funds, and that figure grows to 8.8 percent when foreign pension funds are taken into consideration. Commercial property offers these funds a way to spread their risks while earning healthy returns, and real estate has now become a fairly standard part of most institutional portfolios.

According to PREA, the majority of institutional investors expect commercial real estate returns to decline from their current 8.3 percent level to 5.7 percent by the end of 2018, but this is not expected to be enough to deter them from buying further. However, these investors may seek out different types of property as market conditions continue to evolve. The leisure and hospitality sectors tend to do well in improving economies, and investors may turn to properties in these segments as a hedge against rising interest rates.

Risk is a factor in even the most carefully thought-out investment strategies, and unforeseen legal problems can be particularly thorny problems for investors. Experienced real estate attorneys may scrutinize commercial property investments for potential pitfalls, such as zoning disputes or land use problems, that may not appear on financial disclosure documents, and they could recommend strategies designed to prevent or avoid these issues.

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