The Wall Street Journal reported today that the giant $300 billion California Public Employees Retirement System (Calpers) will increase its real estate allocation from $26 billion to $33 billion. It is not news that commercial real estate prices have surged and are now well above the frothy peak or early 2007. Just as in the late 1980s and and in 2005-2007 it appears that Calpers is weighing in at the top of the market.
Recall that Calpers bought the California land play Catellus and the UK property company Randsworth Trust at the peak of the late 1980s real estate boom. Those investments, to say the least, soured. In 2007 Calpers bought into the giant and highly leveraged Stuyvesant Town apartment project in Manhattan as de-rent control play. Like Randsworth Trust that investment was a wipe-out.
To be sure one can say that Calpers has learned from their previous episodes. This time it will be concentrating on lower risk "core" assets that have become extraordinarily pricey in the global search for yield. Therefore the risk here is very straight forward, cap rates could rise. Basically to take a major position in commercial real estate today the investor has to believe that cap rates will remain low for a decade. To me this could be the riskiest bet of all. After all more money has been lost in the search for yield than in practically any other investment endeavor.
As a result real estate investors should be forewarned. It looks like, yet again, Calpers will be making another top.
Wednesday, October 8, 2014
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