New York Times




Union Pension Funds Give Land a Try



August 7, 1996, Wednesday




NORTH READING, Mass. -- Construction that began in July on an office and warehouse complex here is the latest step in the effort of two labor union pension funds to complete development of an office park they own in this town 15 miles north of Boston.


The project is a joint venture of the Massachusetts Laborers' Pension Fund and two funds established by the carpenters' union -- the Massachusetts State Carpenters Pension Fund and the Massachusetts State Carpenters Guaranteed Annuity Fund.


Organized as the North Reading 93 Investment Corporation, the funds bought the 76-acre River Park office park in 1995 for $30 million.


Pension funds do not usually invest in land development because success is highly dependent on the condition of the leasing market. A drop in the leasing rates can spell trouble for an investor who spent heavily on acquisition and site improvements.


“Many pension funds are more risk averse and would never do land,” said John H. Baxter, managing director of the Boston office of Amresco Advisers Inc. of Dallas, which represents the carpenters' funds. “We bought the buildings and additional land at the tail end of a cycle in which property was being sold in distress situations. We got a great deal, and it is an income-producing property.”


The expectation is that the investment will return about 11 percent annually, two percentage points higher than the typical return from buying a commercial building that already has tenants, Mr. Baxter said.


The development of River Park began in 1988, when the land was bought by a joint venture of a Boston-based real estate firm, Spaulding & Slye, and Copley Real Estate Advisers, which invests for institutional clients.


Lawrence Dwyer, a spokesman for Copley, said the venture put $42 million into the land purchase and site improvements to make seven parcels available for corporate use.


River Park has all the major regulatory permits needed to start construction, and already has some tenant income.


In 1992, when market prices had declined, two of the parcels were leased for 10 years to the Lotus Development Corporation, a leading software maker. Lotus now occupies 350,000 square feet of space that the developer built for use as offices and warehouses and for research and development. Lotus is part of the International Business Machines Corporation.


In July, construction was started on 92,000 square feet of office and warehouse space for a paper products distributor, Lindenmeyr Munroe, a division of Central National-Gottesman Inc. of Purchase, N.Y. The company signed a 12-year lease.


The owners of River Park have hired the Boston-based firm Cabot, Cabot & Forbes of New England Inc. as the development manager of the project, with John J. Doherty, senior vice president, in charge.


Whatever the outcome at River Park, pension funds are likely to remain wary of land development ventures, pension advisers say. The Teachers Insurance and Annuity Association, part of the country's largest pension fund for higher education, stopped investing in land after some ventures in the 1980's failed to produce anticipated returns, according to Joseph W. Luik, the senior managing director.


These days, the association's involvement in real estate is confined to mortgages and bonds. If it were to lend on property, New York State law would require it to have a higher reserve on the investment, Mr. Luik explained.


“The only properties we are lending on are income producing and meet our strict underwriting criteria,” he added.


But pension funds associated with labor organizations are something of an exception to the trend, being more inclined to invest in land because the unions want to help create jobs, said Robert A. Fiddaman, chief executive of Metric Realty, a pension fund real estate adviser in San Francisco.


For example, in Jacksonville, Fla., the Laborers' International Pension Fund has bought four buildings and 3.5 acres of undeveloped land in an industrially zoned area and is building a warehouse and searching for a tenant, said Michael R. Steed, senior vice president of Ullico Inc., an insurance and financial services company in Washington that advises pension funds.


As for the North Reading project, it is in an area north of Boston that is well served by major highways.


“Vacancy rates are holding steady, but demand for build-to-suit space is starting to rise after six years of no new buildings,” said Lowell M. L. Peabody, vice president of the Codman Company, a Boston-based real estate firm. Some developers have resumed building warehouse and back-office space for financial service, software and computer networking companies, he said.


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