September 23, 2023

(Bloomberg)—Fresh off a $4.5 billion deal with a massive Blackstone Inc. property fund, the University of California’s investment office is looking to pour more money into real estate — this time focusing close to home.

The university is proposing to deploy $2 billion to buy or finance buildings near its 10 campuses, including dorms, faculty housing, classrooms and lab space. The properties would be “strictly investment assets, acquired at market rates” and managed by an in-house team, according to a summary prepared for Thursday’s meeting of the university’s Board of Regents.

The proposal by the biggest public research university system in the US comes as investors are pulling away from real estate, with inflation and higher interest rates undercutting values. This month’s collapse of Silicon Valley Bank adds more uncertainty to the economy in California, where the lender played a pivotal role in the venture capital and startup ecosystem.

The Blackstone fund, known as BREIT, has faced heightened redemption requests, prompting the investment giant to limit outflows while pledging to help support 11.25% annual returns in exchange for the University of California’s six-year, $4.5 billion commitment.

BREIT, which invests in multiple property types, owns 289,000 US rental-housing units and is the country’s biggest student-housing landlord. University employee union representatives criticized the BREIT deal in January, arguing Blackstone aggravates California’s housing crisis by prioritizing profits over providing affordable shelter.

The cost of living near classrooms has pushed many University of California students into homelessness, leading campuses to offer emergency housing services.

A coalition of University of California workers plans to picket a Regents meeting Wednesday to demand the university divest from Blackstone.

“UC should be both investing in more affordable-housing supply and higher wages for its most vulnerable workers,” Kathryn Lybarger, an adviser representing labor on the UC Regents Investment Committee, said in a statement.

Funds for the new real estate push would come from the university’s pension and endowment pools, which had a combined $100.8 billion as of Dec. 31. An in-house “entrepreneurial team” would be created to spearhead the effort.

The university may have a model in the Washington State Investment Board, which established in-house real estate operating companies decades ago, according to Ashby Monk, executive director of the Stanford Research Initiative on Long-Term Investing. Those companies have been the biggest drivers of returns for the board’s property portfolio, according to the latest annual report for the $150 billion state pool.

“Great evidence of how to do it exists in the US pension industry,” Monk said in a telephone interview.

University of California’s chief investment officer, Jagdeep Bachher, floated a $1 billion in-house real estate unit at a January meeting after regent Jose Hernandez questioned why the university was giving money to Blackstone instead of investing directly in campus housing.

Bachher wasn’t available to comment before Thursday’s meeting, according to a spokesman.

The investment office has a fiduciary duty to generate market-rate returns, which rules out investing in reduced-rent housing for students or employees, Nathan Brostrom, the university’s chief financial officer, said at a November Board of Regents meeting.

“I certainly don’t want to take on another day job of trying to be a real estate developer,” Bachher said at the November meeting. “But I think within the boundary conditions of this great institution, there’s a huge opportunity here to be in business for real estate.”

To contact the author of this story: John Gittelsohn in Los Angeles at [email protected]

© 2023 Bloomberg L.P.

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