Monday, August 11, 2008

Signs of the Times...

Two distressing articles paint a scary picture of the economy going forward, but in one commercial real estate seems to be a relative bright spot.

The first article, from NREI, describes the losses over the past fiscal year at CalPERS and CalSTRS, two of the nation's largest pension funds. Although mild at 2.4% and 3.7% respectively, these losses are unusual for these massive institutions - CalPERS has earned positive returns in 21 of the past 25 years. The bright spot for the commercial real estate industry here is that the two pension funds' real estate investments returned 8.1% and 11.8% over the past year, with most of these gains coming in the second half of 2007. Unfortunately the 'denominator effect' will cause both funds to allocate less money to real estate investment as long as the value of their other holdings keep going down in order to maintain target asset allocations.

This article from CBS Marketwatch describes the Fed's survey of 52 banks which shows that a majority of them have tightened credit standards across the board. In fact 81% of banks surveyed tightened lending standards for commercial real estate. Given that this is a backward-looking survey we can hope that the tightening is slowing, but most of the sentiment in the market seems to be that it will only get harder over the next year.

So, with banks out of the picture and pension funds likely to pull back on real estate investing, the pool of capital is shallower than ever. Over the next year (or more?) those who can creatively source funding for deals will likely come out ahead.

Llenrock Group

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