Monday’s Numbers: September 29, 2014

That anguished cry you heard from the capital markets during the week was the result of the California Public Employees’ Retirement System (CalPERS) announcing that it would no longer invest in hedge funds, saying they were too time-consuming and too complex, and had produced unsatisfactory rates of return over the past one-, three-, and five-year periods. Since CalPERS is clearly the 800-pound gorilla in the room—it’s the largest pension fund in the United States—its announcement will have serious repercussions in the pension fund advisory, management, and investment businesses, as it will for the pension funds themselves as they look at a new pile of money they have to invest.

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Also making a racket were the hedge funds themselves, as they tried to assess the impact of the CalPERS announcement on their business model. If the CalPERS announcement really excites the herd, watch out—a “flow of funds” may be in the offing.

Smarter people than us will analyze and reanalyze the CalPERS decision, and it will be debated and discussed at conferences and symposiums through year-end and beyond.

Could real estate be next? It’s unlikely—real estate returns over the one-, three-, and five-year periods have been excellent.

Of greater importance is the question of whether a “tipping point” can be reached—i.e., a point where investors’ patience will be more than “sorely tested” and they will strike with the only tool available to them: their feet, so to speak. Could this lead to a period of activist pension funds banding together to terrorize the investment managers of one or more “investment strategies” or theses?

If Size Matters

It is estimated that the top 100 banking companies hold almost $1 trillion of commercial real estate mortgages, allocated as follows:

If we change the metric to overall holders of commercial real estate debt, the breakdown is as follows (as of December 31, 2013) in billions of dollars:

Monday’s Numbers: September 29, 2014

The Trepp survey for the week ending September 19, 2014, showed average spreads coming in as many as 10 basis points, with the average breaking the 130-basis-point barrier. The implied rate for ten-year, modestly leveraged commercial real estate mortgages equaled 3.89 percent—75 basis points lower than at year-end 2013. If you are waiting for someone to ring a bell and say that we have reached the bottom, consider the bell rung. Think twice about ignoring these record-low levels. A quote from Herbert Stein, President Richard Nixon’s economic adviser, seems appropriate and timely: In responding to a reporter’s question at a news conference, Stein was heard to say, “An unsustainable trend will not last forever.”

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads dated September 11, 2014, showed spreads increasing 10 to 15 basis points across the board compared with the prior survey (dated July 4) as lenders seem to be trying to make up some ground after the “great low spreads due to low Treasury yields giveaway” of the past few months. Even with the uptick in rates, it remains an attractive time to finance or refinance commercial real estate.

Year-to-Date Public Equity Capital Markets

Dow Jones Industrial Average: +3.24 percent

Standard & Poor’s 500 Stock Index: +7.28 percent

NASD Composite Index (NASDAQ): +8.04 percent

Russell 2000: –3.81 percent

Morgan Stanley U.S. REIT Index: +8.74 percent

Year-to-Date U.S. Treasury Yields