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TACOMA, WA-Despite the real estate downturn in markets across the country, Karl Smith, a managing director with Frank Russell Co., a firm managing more than $66 billion, tells GlobeSt.com it is “absolutely” continuing to advise its pension fund clients to hold a commercial real estate position in their diversified portfolios.

“There’s no doubt that real estate isn’t immune from what’s happening in the broader economy,” says Smith, whose firm handles the pension fund dollars of corporations like AT&T, Hitachi, BHP and General Motors. “But in our view real estate has evolved, and we do feel that it should be included in most pension plans’ asset strategies.”

“Real estate has been the best-performing asset class over the last three years—by a significant margin,” says Smith. “It has also achieved those returns with significantly less volatility than other classes of assets,” he adds. In the last three years, Smith says those annualized three-year returns, as of June 30, were 11.9%–as compared to 3.9% for U.S. equities, 6.3% for U.S. fixed income, and -0.9% for international equities. “Clearly,” says Smith, “investors with meaningful allocations in real estate over that period have been rewarded.

For its clients, Smith says Russell focuses on two types of strategies, core and non-core. “Our core strategies contain well-leased properties in major metropolitan markets, in the four sectors of office, industrial, multi-family and retail,” says Smith, adding, “Non-core strategies are those where you’re taking on more risk. Of course, you expect higher returns.”

Where does Smith see the estate market going in the near future? “We think there will be different impacts according to property type,” he says. “Multi-family should do well under current conditions. Office varies from market to market. Vacancies will increase, but those properties leased up with credit tenants will continue to be attractive investments.” On the other hand, says Smith, “Retail and hotels will be impacted most significantly.”

Of all the sectors, Smith says retail is the most difficult to analyze. “There’s the regional malls on one end—and grocery-anchored centers on the other,” he explains. “We’re already seeing a slowdown in retail spending that will impact regional malls—more so than grocery-anchored centers where people will continue to buy groceries, go to drug stores and do their dry cleaning.”

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