Despite coming off a three-year bear market in real estate, now is a strong time for the California State Teachers’ Retirement System (CalSTRS) to deploy capital strategically, according to Ben Maslan, managing director at RCLCO Fund Advisors.
He shared his insights during a recent CalSTRS Board meeting. “Having dry powder available allows the fund to act opportunistically across sectors.”
Over the long term, CalSTRS’ real estate portfolio continues to outperform its benchmarks by roughly 100 basis points over both five- (3.1% vs 2.0%) and 10-year (5.8% vs 4.7%) periods. However, over three- (-5.1%) and one-year periods (-3.6%), the portfolio has roughly matched the benchmark, reflecting recent market headwinds.
As of the end of the first quarter of 2025, CalSTRS’ real estate portfolio had a NAV of $46.3B or 13.3% of the total fund, which is below its target allocation of 15% — albeit within the permitted range.
Market corrections over the past three years have left CalSTRS overallocated to office by 4.1%, relative to its benchmarks and underallocated to industrial and multi-family apartment properties by 9% and 6%, respectively, contributing to short-term performance gaps.
CalSTRS’ staff has taken a long-term approach, working for several years to reduce exposure to conventional office space, said Scott Chan, CalSTRS’ chief executive officer. He also noted that much of the fund’s office investment is in life sciences real estate, including laboratory space for pharmaceutical development.
However, selling office and life sciences assets remains challenging due to market illiquidity. “The goal is to reduce exposure without selling below market value or below where we expect these assets could be valued in the coming years,” Chan added.
Maslan emphasized that while the office overweight has contributed to short-term underperformance, the fund remains focused on long-term results. “Over the long term, there has been continued outperformance relative to the benchmark,” he said.
However, valuations are beginning to stabilize, said Taylor Mammen, CEO of RCLCO Fund Advisors. He noted that the era of historic new supply — particularly in multi-family and industrial sectors — is receding, creating conditions for more balanced markets.
“We’re approaching a period where development of new residential and industrial assets will be below long-term historical averages,” said Mammen. “Office and retail were already quite low, which should support rent growth and [net operating income] performance…. Real estate pricing, which has been declining for three years, has begun to rebound. Most property types — with the exception of office — moved into positive territory on a year-over-year basis in the second quarter and are continuing to recover from their 2024 lows.”
Meeting materials present by RCLCO during the meeting noted real estate prices have mostly reset at 15-35% below peak, creating good entry points for new capital. The materials also noted a further correction
is unlikely, with gateway markets and alternative sectors expected to outperform in the near to mid-term.
“Real estate valuations reached a floor in most product types and improved slightly in Q1 2025, and these are expected to begin or continue recovering in H2 2025 and into 2026,” outlined the materials.
Mammen cautioned that risks remain, including potential inflation, high interest rates, and recessionary pressures, which could negatively impact asset values and operating performance.
Still, he suggested that the current environment presents a compelling opportunity for CalSTRS to invest, noting, if the fund has dry powder available, now may be the right time to deploy it.
