In April and May of 1992, in the wake of the acquittal of four police officers in the Rodney King trial, Los Angeles burned. After three long days of unrest, U.S. Marines in tanks and armored personnel carriers would be deployed to restore order, but not before more than a thousand buildings were destroyed by fire. Total property damage would ultimately hit $1 billion.
In the years immediately following the riots, pressure loomed large on politicians and organizations alike to reinvest in the city, particularly in the South Central neighborhoods hit hardest by the violence and destruction. The California Public Employees Retirement System, known as CalPERS, was not immune to that call, and in 1995, the pension fund asked its 12 core managers to submit proposals for inner-city real estate investments. They got one response: a joint venture retail proposal from Victor MacFarlane and his San Francisco-based real estate investment advisory firm, MacFarlane Partners.
With the images of Reginald Denny being dragged from his truck and beaten by rioters still fresh in the minds of Los Angeles residents, MacFarlane and L.A. Lakers point guard and future NBA hall-of-famer Earvin “Magic” Johnson offered a more restorative vision. Specifically, they believed that the inner city was underserved in per capita retail square footage compared to Los Angeles suburbs. Moreover, urban communities boasted a much higher population density than the typical sprawling subdivisions of Southern California.
“The inner city was effectively red-lined for institutional investors back in those days, and urban investments were just assumed to be social investments because it seemed you could not make institutional-level returns,” MacFarlane explains. “But our attribution analysis of retail proved that the buying power in the inner city for basic goods and staples was equal to or greater than most suburban communities in California.”
CalPERS agreed, and it earmarked $50 million for the proposal, a mere sliver of the fund's $85 billion total, but the first urban investment that the pension fund—or any institutional capital provider—had ever made.
Less than a decade later, the MacFarlane/Johnson portfolio of three properties was sold, netting CalPERS a 33 percent return and proving MacFarlane's theory once and for all: Social responsibility aside, there was money to be made by investing in the hood. The firm has since capitalized on the experience, and this month, MacFarlane Partners will close on its second urban real estate fund. At $1 billion (leveraged to nearly $3 billion), the fund allows for inner-city investment in strongholds from California to Washington, D.C., to New York. In short, it has guaranteed Victor MacFarlane's role as a luminary in today's well financed, urban development kingdom.
INNER-CITY PIONEERS MacFarlane's philosophy is simple: While real estate can follow the needs of people—as it did in L.A.—it also tends to follow the people themselves. And people, on a global scale, are moving inexorably into the cities. Where established metros do not exist, people are urbanizing the suburban lifestyle.
“When we talk about urban, we don't just mean downtown,” MacFarlane says. “We're talking about Emeryville in Oakland, about Orange County outside of Los Angeles. Urban is a concept that extends to the edge cities and the nodes that are starting to densify because you have this ability to create a place where people want to live, work, and play. At the end of the day, that is really what it is all about.”
Still, it's in traditional downtowns where MacFarlane has an uncanny ability to distill the social betterment component of urban investment down to its bare economic realities—as he did in post-riots L.A. That the lone development pitch in the tumultuous times came from MacFarlane was hardly a surprise, however, given his somewhat maverick status at CalPERS.
In the late 1980s, attempts to become a core manager at the pension fund were met with policy denials because his recently formed MacFarlane Partners was bereft of the baseline qualification: at least $500 million under management for more than five years. Undaunted, MacFarlane created a presentation highlighting his direct involvement with more than $1 billion in assets during his years with Aetna Life and Casualty. He argued that MacFarlane Partners' lifetime credentials were equal to or better than any of CalPERS' other money mangers. And he made the pitch to anyone who would listen—CalPERS board members, chief executives, field reps. He did this every six weeks. For three years.
