The Canada Pension Plan Investment Board says it jumped at the opportunity to invest in two office buildings in Washington, D.C., where property prices are "clearly more attractive" than they were three years ago.
The board - which invests the funds not immediately required by the Canada Pension Plan to pay pensioners - said Wednesday it will pay $237-million (U.S.) for a 45 per cent stake in the two properties, including $91-million in equity and $146-million of the outstanding mortgage debt.
"We had resisted over the past few years to make significant investment in these (target) markets because we did find the pricing a little expensive and we do find that now is a good time to invest in key markets like New York and D.C.," said Peter Ballon, vice-president and head of the Americas division of CPPIB's real estate investments.
"So when two high quality office properties became available ... this was an opportunity that we found as being very, very attractive."
The board has identified New York City, Washington, D.C., and Los Angeles as its primary U.S. target markets for investment in office properties because they are more stable than the rest of the country, Mr. Ballon said.
The U.S. real estate market has suffered major damage during the recession and continues to grapple with a widespread residential foreclosure crisis, as well as high unemployment and tight credit markets.
But CPPIB is comfortable with taking on mortgage debt despite the challenges facing the U.S. real estate market, Mr. Ballon said.
"We are not concerned by the debt market in the U.S. if anything we see it as an opportunity because we are typically an equity purchaser and do not need debt to make acquisitions," he said.
The board is partnering with Vornado Realty Trust in the joint venture. CPPIB it will hold a 45 per cent ownership of 1299 Pennsylvania Avenue, known as the Warner Building, and 1101 17th Street NW. Vornado will retain 55 per cent ownership of the two buildings. Together, the buildings, located in the central business district, have a total implied value of $526-million.
Vornado, which will manage and lease both of the properties, will recognize a net gain of $54-million related to the sale of the Warner building in the fourth quarter, with the transaction for the other building to be recognized in the future.
The CPPIB has been buying up office properties as of late.
In August, the board made two plays for global commercial real estate. It partnered with a European real estate firm to buy an eight-floor office building in London, for £183-million ($290-million) and teamed up with Australia's Future Fund to invest $750-million Australian ($740-million) in a retail property fund.
In May, it said it would pay $663-million to buy 45 per cent minority stakes in two office properties in the heart of Manhattan, including a 51 story skyscraper that is part of the Rockefeller Center complex.
CPPIB continues to seek out opportunities for investment in the Canadian market, but Mr. Ballon said there are fewer domestic opportunities because the market is small.
The CPPIB is designed to build up a pool of investments that can generate enough money to take up the slack as contributions from employers and employees fall short of payouts.