Commercial Real Estate Threatens Oregon State Pension Funds

Pension plans in general are in deep trouble. The state of Oregon is the latest on the long, growing list of pension concerns.

Please consider Real estate woes threaten Oregon state pension fund.

The Oregon Investment Council, a citizens board that invests the $45 billion state pension fund, held its annual review of its real estate investments Wednesday. The numbers didn't look good, and according to Nori Lietz, a consultant with the Partners Group who advises the pension fund on real estate investments, "there's still more negative news to come."

Overall, the value of those holdings has fallen 28 percent in the past year.

Now it's all about the economy, which is bleeding the pension fund's other real estate investments. Commercial real estate tends to lag the economy. Job growth, for instance, is a leading indicator of office rentals and supports apartment leasing, retail and industrial space.

Those fundamentals look increasingly dismal. Vacancy rates are climbing and rents are down, putting pressure on the cash flows that property owners use to service their debt. Consequently, delinquency rates are up and property values are falling.

Lietz, the OIC's consultant, said she expects equity values in the U.S. commercial property market to decline by another 25 percent over the next two years.

The refinancing squeeze is pushing more borrowers into foreclosure. And ironically, Lietz said, bankers have been foreclosing on the best assets in their loan portfolios because properties that still have decent cash flows are easier to manage internally or sell. That leaves them with loans on more marginal properties that are far more difficult to manage.

Leitz believes the government's policies to help banks unwind their problems may end up exacerbating them. Earlier this year, the Obama Administration relaxed accounting standards that forced banks to reflect the fair value of their real estate loans on their books. In theory, that buys time for the commercial real estate market to recover, and potentially bail banks out of some of their problem loans.

But if the market doesn't bounce back, banks will be saddled with billions in nonperforming loans and remain reluctant to lend, anchoring the economy indefinitely.

In Japan, banks followed that course after the collapse of their late 80s real estate bubble. The subsequent period of economic stagnation became known as "the lost decade."

Treasury Department Claims Numbers Are Meaningless

Interestingly, the article reports that the Treasury claims "the one-year numbers are essentially meaningless."

One has to wonder, what the state Treasury department was saying a few years' back when values were soaring. Were one year gains meaningless then or is meaningless one-sided?

Oregon CalPERS Connection

The Oregon CalPERS connection is also interesting. From the article:

Last week, one of Portland's signature properties showed up on that radar when New York Life Insurance sued FPS KOIN Center LLC, owner of the fancy downtown office building, claiming the company failed to make its July mortgage payment on the building.

FPS is a partnership of California's massive public pension fund, CalPERS, and a Los Angeles real estate investment firm. They bought the KOIN Center in the summer of 2007 for $108 million.

CalPERS, as frequently discussed is at the very heart of the pension crisis. Please see Calpers Rolls the Dice, Gambling that Riskier Bets will Restore its Health for details.

Fears of a "Lost Decade"

Leitz believes the government's policies to help banks unwind their problems may end up exacerbating them.

In Japan, banks followed that course after the collapse of their late 80s real estate bubble. The subsequent period of economic stagnation became known as "the lost decade."

At long last, someone is finally mentioning what I have been talking about for years: the likelihood the Fed's and the administration's policies extend the problem for years, and the possibility of a lost decade (two actually), in the US.

Please consider the following snip from Buy and Hold Still Bad Advice:

Clearly stocks are a better buy now than in 2007 or 2008. But that does not mean stocks are cheap. Indeed, by any realistic measure of earnings, stocks are decidedly not cheap. Then again, 6-month treasury yields are yielding a paltry .31%.

Can equities easily beat that? Yes they might, but that does not mean they will!

Fundamentally, the S&P 500 can easily fall to 500 or below, a massive crash from this point. Alternatively, stocks might languish for years.

Two Lost Decades



The Japanese Stock Market is about 25% of what it was close to 20 years ago! Yes, I know, the US is not Japan, that deflation can't happen here, etc, etc. Of course deflation did happen here, so the question now is how long it lasts. Even if it does not last long, there are no guarantees the stock market stages a significant recovery.

Odds of a full recovery in state pension plans is zero without significant reform. Yet not a single state is addressing the real issue: promises that cannot be met and the need to lower costs by reducing benefits and phasing out the plans.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List