For Pension Funds, Crisis Spawns Search for a New Metric
	Why Supply-Constrained Markets Hold So Many Advantages
	Cornerstone Real Estate Advisers Increases Footprint in Europe

In the span of only 12 months, U.S. pension funds, one of the largest institutional investors in commercial real estate, have adopted an entirely new mindset — a balance sheet mentality if you will — when it comes to how they measure the success and failure of their investments in the future.

Only a year ago, the first annual “U.S. Pension Risk Behavior Index Study” conducted by MetLife found that pension fund managers were narrowly focused on only a few key asset-related barometers — including asset allocation and return on investment — as the primary guides for their success. Those are the same metrics they’ve been using for the past 20 years or so.

Now the second annual MetLife study has found that those same managers are considering an entirely new set of criteria, and a new set of complications, to measure their results. These revolve around the future liabilities to pension plans, their “funded status” and future cash flows.

“The risks that were a key focal point a year ago were all traditional investment-oriented risks to the exclusion of virtually every other possible risk,” says Cynthia Mallett, vice president of corporate benefit funding at MetLife. “That’s what made the second-year study so striking — that a year could make such a difference.”

Structural constraints on the delivery of new supply in a given market reduce an owner’s competition for tenants, which may lead to higher occupancy, higher rent levels, stronger rent growth and higher capital values over time.

How supply responds to increasing demand varies across metro areas. If supply cannot be added to meet additional tenant demand, then rents will rise accordingly. The amount of new supply that can be added directly affects the corresponding change in rents.

Therefore, markets with constrained supply should have greater rent growth during demand surges and a higher rent level given equal demand relative to markets with excess supply.

Defining supply constraints

Supply constraints are broadly defined as limitations of the ability of a market to deliver new stock. These constraints generally fall into three categories, with some overlap among them:

• Legal/institutional: Zoning and land-use regulations limit the location, quantity and/or pace of new development.

• Geographical/physical: Physical limitations such as waterways, physical features and soil conditions limit the amount of new development. This category may also include the effect of existing development at a scale and density that limits available sites, resulting in a “crowding-out” effect.

Cornerstone Real Estate Advisers LLC has completed its acquisition of London-based Protego Real Estate Investors LLP, Protego Real Estate Investors Finance LLP and their subsidiaries in a move that increases the organization’s depth and breadth in the European market.

Hartford, Conn.-based Cornerstone will expand its platform in Europe through Protego, which provides real estate investment advisory services to a variety of clients through funds and separate accounts.

Protego, which focuses primarily on office, retail and industrial property, will retain its brand name. Cornerstone also is integrating the personnel and assets of Babson Capital Management’s Real Estate Finance Group. That move is due to be completed sometime in the first quarter of 2010. The merged entities will manage or service approximately $30 billion of assets.

“With our acquisition of Protego, Cornerstone is positioned to provide a broad range of real estate debt, equity and securities expertise within Europe, which is a long-established and very promising market,” says Cornerstone President and CEO David Reilly.

“At the same time, we will be expanding our advisory services to clients who increasingly want to diversify their risk by focusing on a global investment strategy,” adds Reilly.

While Cornerstone will enhance its global reach, Protego will have the ability to offer a wider array of investment opportunities to its clients and will benefit from Cornerstone’s financial strength and resources, says Iain Reid, CEO of Protego, which has approximately $2.5 billion of assets under management.

“We will now be able to offer our institutional and wealth management clients access to both public and private debt and equity that will enable us to continue the rapid growth of our business in Europe,” says Reid. “We also will be able to offer our clients access to opportunities in the U.S. through Cornerstone’s presence there.”