Claremont Insider: Sign of the Times: Distressed Property

Saturday, November 15, 2008

Sign of the Times: Distressed Property

It's been about seven months since we last checked, but foreclosures are up markedly in Claremont. In April, Yahoo's real estate site listed 97 foreclosures in town. Today when we checked, there were 153 listed:

Click to Enlarge

That's a nearly 58% increase in 7 months, for those keeping score at home. As we've discovered since then, the real estate and mortgage problems have spilled over into the financial markets. On Thursday, the Los Angeles Times reported that the California Public Employees Retirement System (CalPERS) had lost 35% of the value of its real estate investments, down to $6.03 billion from $9.36 billion.

According to the Times article, real estate is a small part of the total CalPERS portfolio, but it's still a significant hit, and the overall picture, at least in the short term for CalPERS, is not good:
The decline in real estate represents a portion of CalPERS losses since the fund hit a high of $247.7 billion on June 30, 2007. It fell to $239.2 billion a year later and since then has plunged a further 23%, to $184.2 billion as of Monday.

CalPERS provides pension benefits for 1.6 million current and former employees of the state and many local governments and school districts. Those employers, which are suffering from strained budgets, could be forced to increase their contributions to the pension fund if CalPERS' investment performance does not turn around in the next couple of years.

"It's certainly frightening for those who look forward to getting their pensions from the California system," said Gary Painter, director of research at the Lusk Center for Real Estate at USC.

One of the big losses was the now-bankrupt 15,000-acre LandSource Community Development tract close to Santa Clarita, in which CalPERS was the majority stake holder with a $970 million investment. The Times reported that a study of CalPERS' real estate investments showed that they may have greatly underestimated their risk exposure:
According to the report produced for CalPERS by Le Plastrier Development Consulting of Irvine, the loss in value was amplified by CalPERS' reliance on loans to ramp up housing investments to a peak of about 20% of its real estate portfolio. The investments were over-concentrated by age, geography and product type and lacked safeguards against a market decline, Le Plastrier said.

Within CalPERS' portfolio, 80% of the properties are in distressed markets in California, Arizona, Florida and Texas. Along with that of other investors, CalPERS' stake in housing "expanded greatly between 2004 and 2006," CalPERS staff said in a briefing for the board's investment committee. The committee is scheduled to meet Monday.

The City of Claremont's employees have their retirements with CalPERS, and the financial impact of those commitments was a subject of discussion at last Saturday's City Council priorities meeting. We'll have more on that in a day or two.