Earlier this week, Avi Schick, the recently departed COO of the state’s development agency, penned an op-ed in the Daily News calling for the city and state comptrollers to put $2 billion of their $200 billion or so in pension investments specifically toward the beleaguered commercial real estate sector. Per the op-ed, the pension funds, along with money raised from the private sector, could spark the end of a drought of liquidity in the commercial real estate world.
“By extending financing when traditional lenders are unwilling or unable to, New York will secure its future and that of its retirees,” wrote Mr. Schick, who is chairman of the Lower Manhattan Development Corporation.
Given that the world’s financial institutions don’t seem to have any interest at all in commercial real estate these days, I called Mr. Schick to get a bit more of an explanation.
He views the current liquidity shortage as market failure; even good projects and existing buildings with long-term leases are unable to find lenders, he said. Therefore the concept—investing pension money in real estate—would seek to both help stable projects and potentially bring good returns.
“If you have a project in which you’ll have owner’s equity at 30, 40 percent,” he said, “you have a tenant lined up and a letter of credit, you can’t get a nickel, and that’s a problem, and that’s a fact.
“Focus on new York, focus on a sector where there’s no liquidity,” he continued, “because generally, when there’s a market failure if you can go in and structure it, you can do well.”
Mr. Schick said he was not advocating that the pensions invest in large speculative office projects, but rather provide financing for less risky, smaller projects and refinancings.
Of course, with the economy still in shambles, a volatile stock market, and widespread uncertainty about the financial crisis’ effects on New York City employment in the long-term, it seems that most any investment in commercial real estate is a rather risky one. Office rents can swing relatively wildly, as employment projections jump up and down; and it can take years to add significant new Class A office space.
Further, some pain for the New York office market might not be the worst possible outcome, Nicole Gelinas wrote for the right-leaning Manhattan Institute yesterday. Giving Mr. Schick’s idea an ice-cold reception, she wrote that the “commercial real-estate market needs to purge itself of its speculative assumptions,” and that “state and city pension funds—and taxpayers—therefore would face a risk of significant losses at exactly the wrong time.”
On the subject of risk, Mr. Schick said the comptrollers should evaluate these investments as they do any other, and should invest not with the aim of bailing out the landlords, but with ultimately generating a good return.
The New York Post’s Steve Cuozzo also didn’t seem all that keen on the idea based on a piece he wrote yesterday entitled “A Hidden Agenda at the Daily News,” in which he saw a connection between Mr. Schick’s piece and Daily News owner/commercial real estate mogul Mort Zuckerman.
I queried both the city and state comptroller offices on the idea, neither of which responded with comment.