Pimco Targets Out-of-Date Assets in New Real Estate Strategy

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(Bloomberg) — Pimco Prime Real Estate is rolling out a new strategy that will target out-of-date buildings in major cities, with a view to making them more suited to a world increasingly shaped by extreme weather. 

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The unit of Pacific Investment Management Co., which manages about $85 billion for its parent Allianz Group, plans to acquire older buildings that have the potential to be converted into greener, more appealing properties.

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“We think this could be attractive to clients from a commercial perspective,” said Raphael Mertens, Pimco Prime Real Estate’s chief sustainability officer. There are “opportunities in buying older assets in good locations to upgrade them,” he said, without providing financial details for the new strategy.

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The investor plans to focus on geographic markets in which local policies support climate resilience, he said. 

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The strategy coincides with a rise in regulations across major economies requiring landlords to limit the environmental footprint of their buildings. In the UK, a report recently found that large parts of central London “risk obsolescence” if owners don’t embark on major green refurbishments. Against that backdrop, Blackstone Inc., Brookfield Asset Management Ltd. and Henderson Park Capital Partners are among firms looking at brown-to-green deals.

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Even in the US, where the Trump administration has vilified green policies, some investors are still finding opportunities to allocate capital to the decarbonization of commercial real estate. Galvanize, the alternative investment manager co-founded by billionaire Tom Steyer, said last month it expects higher energy prices to support its brown-to-green CRE strategy.

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Mertens said the portfolio he helps oversee at Pimco is staying away from markets where a failure to prepare for extreme weather conditions has already undermined access to insurance. Places to avoid include much of Florida and California, as well as parts of Asia in which property insurance is now unavailable, he said. 

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“We would never buy a building that can’t find insurance,” Mertens said. 

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On the other end of the scale are Paris, Munich, Sydney and New York, which he said are all examples of cities that Pimco likes, because they “have already invested sufficiently in climate-risk countermeasures.”

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Even in Florida and California, it’s possible to find attractive pockets with acceptable climate risks, Mertens said. For example, Pimco has invested in Waterford Business District, a business hub near Miami that it owns together with Nuveen. In California, Mertens says Pimco has invested properties in San Francisco, Palo Alto and Irvine in California, after judging that “none of these assets are exposed to significant wildfire or other climate-related risks.”

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Property values in the US alone could plunge as much as $1.5 trillion over the next 30 years if landlords don’t adapt to climate change, according to a 2025 study by First Street Technology Inc. The risks are already feeding through to insurance costs.

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Premiums for US commercial properties have climbed more than 150% in less than 10 years, First Street researchers estimate. In Europe, less than a fourth of the losses caused by natural catastrophes are covered by insurance, according to a recent estimate by the European Central Bank. In some countries, the figure is less than 5%. 

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Many property owners and investors are lulled into thinking extreme weather doesn’t pose a risk because they “tend to underestimate how fast climate is changing,” Mertens said. 

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But “insurance needs to be renewed every one or two years,” and weather patterns are “becoming more and more extreme,” he said.

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—With assistance from Jack Sidders.

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