As real estate investment trusts have stepped back from their aggressive acquisition activity of a few years ago, another player is becoming more visible.

Pension funds have capitalized on the decreased competition from the once-formidable REITs, and at the same time grown flush as their portfolios mushroomed from gains in the stock market.

“Pension funds are holding steady if not rising because of the REIT retreat,” said Ted Leary, president of Lowe Enterprises Investment Management. “Pension funds are the real money around.”

Last year, pension funds comprised 53.8 percent of commercial real estate buyers in the L.A. area, compared with 36.6 percent the year before, according to Institutional Real Estate Inc. REITs, meanwhile, were at 18.6 percent, down from 26.2 percent in 1998.

The most active pension fund advisors last year in L.A. included RREEF Funds, J.P. Morgan Investment Management, Lend Lease Real Estate Investments and Douglas Emmett Realty Advisors.

Pension fund equity investments in real estate collectively grew from $6.3 billion nationwide in 1993 to $29.3 billion last year, according to Institutional Real Estate. The firm expects that figure to exceed $30 billion this year, as rising interest rates put the squeeze on leveraged buyers.

Pension funds typically allocate 5-10 percent of their portfolios to real estate. But the remaining assets have grown so quickly with the rise of the stock market that the relative allocations of funds to real estate has declined, leaving some pension funds under-allocated.

“That in part is a driving force here,” said Robert Zerbst, president of CB Richard Ellis Investors.

The California Public Employees Retirement System actually decreased its real estate allocation because the pool of money was growing faster than could be invested.

As pension funds have invested more in real estate, they have also grown more aggressive and adventurous. Ten years ago, 95 percent of their real estate investments were in four core property types institutional-quality office, retail, industrial, and apartment projects that were leased up. Portfolios were generally unleveraged.

“Now there’s more appetite to expand beyond that,” said Bruce Eidelson, director of real estate advisory services at Russell Real Estate Advisors. “Capital is looking for the best risk-adjusted returns, not just certain narrowly described parameters.”

Only 50 percent of pension fund portfolios are in core real estate today, while the opportunistic investments have grown from next to nothing 10 years ago to 20 percent, Eidelson said.

Opportunistic investments are those that produce returns of 18 percent or more, and by definition those are higher risk. That could include land development, properties that need to be renovated or leased up, or that are in depressed markets, as well as real estate in Asia and Central Europe.

“Pension funds are increasingly more sophisticated about real estate,” said Victor MacFarlane, a San Francisco-based real estate investment advisor who is partnering with Magic Johnson to invest about $100 million for CalPERS in retail development in predominantly minority neighborhoods.