In their recent quarterly survey Citi Corp Real Estate Inc. and the Advance Mortgage Corp. found that primary sources of funds for the commercial property market virtually have dried up in some parts of the country.
The situation for mutual savings banks is particularly acute in the Northeast. And, although construction activity remains strong, the surveyors said that many institutions have stopped making forward commitments for office and apartment building morgages. The real crunch is expected later this year or early next.
As in any financial crisis, the search is on for new sources of money. Last month, a pledge by New York City's public pension funds to purchase some $565 million in city bonds helped the city out of a short-term bind. Could private and public pension funds, whose assets now total just over half a trillion dollars, come to the rescue in a tight mortgage credit situation? Although fund investors prefer existing property to new property, could their dollars free up others for construction?
The short answer is: not enough to make any noticeable impact. A recent issue of Pensions & Investments stated, "The much touted jump into real estate, eagerly awaited by real estate industry observers over the last five years, has simply failed to materialize."
As late as last year, some investment counselors confidently were predicting that the largest pension funds would increase their investment in real estate by 50 percent, amounting to $6 billion over three years. Others forecast that 5 percent or more of pension fund assets would be in real estate within a decade. They pointed to the building boom that followed the 1974-75 recession and to the 1974 Employe Retirement Income Security Act, which directed fund administrators to diversify their investments.
Yet various physical and psychological factors have prevented this prophecy from becoming a reality. Among them are too-fresh memories of the real estate investment trust fiascos during the early 1970s, the Teamsters pension fund scandal involving Las Vegas casinos and a portfolio of foreclosed land loans, a lack of liquidity, and a scarcity of good income-producing properties caused by new competition from foreign funds and corporations. Moreover, the tradition of investing a sizeable proportion of pension assets in common stocks dies hard. Most fund managers have securities backgrounds and, as such, are wary of an industry that is not regulated by a government agency the way the stock market is regulated by the Securities and Exchange Commission.
Last year life insurance companies put 31 percent of their assets into real estate, 28 percent of it in the form of mortgages. The figure for pension funds ranges from less than one percent to more than 3 percent, depending on the source consulted. The SEC does not break out equity property in its year-end (voluntary) survey of how private pension funds invest their money. As for mortgages, it listed pension funds holding only $2.5 billion worth in 1977, a mere 1.4 percent of $181.5 billion in total reported assets.
However, pension funds' actual contribution to the mortgage market is undoubtedly higher, for the SEC observed a significant 11 percent increase last year in the amount of government securities owned by pension funds. At least part of that $20 billion is believed to be increased participation in the secondary mortgage market through instruments such as Government National Mortgage Association pass-through securities. The First Boston Corp. estimates that pension funds directly own $11.5 billion of Ginnie Maes, and that they bought $566 million of Federal Home Loan Mortgage Corp. mortgage participation certificates in 1977 and during the first quarter of 1978.
Money Market Directories Inc. last year predicted a 50 percent increase in investment. It has estimated that the 300 largest pension funds in the country, each with assets of more than $100 million, had $1.8 billion in equity property ownership and $3.4 billion in mortgages in 1977. Yet fewer than half of the 180 in the survey sample either owned investment property or held mortgages in their portfolios. The Boston Co. Real Estate Counsel, one of the few real estate advisers to pension funds, put fund property holdings at $2.5 billion last year.
Though the unit of measure is billions of dollars, property values are so staggering that the contribution of pension funds is negligible. Stated another way, Pensions & Investments calculates that benefit funds in 1977 owned less than one-hundredth of one percent of all real estate in the United States or two-thirds of one percent of new property construction.
As for the great pension fund leap forward into real estate, Greenwich Research Associates recently released its own survey, done last winter, of pension administrators for 933 of the country's largest corporations. Only 3 percent of all the funds and 14 percent of those with assets of more than $200 million intended to increase their investments in real estate.
Smith Barney, Harris Upham & Co. manages $300 million in real estate investments, of which $12 to $14 million comes from pension funds. It makes 20 to 25 equity purchases a year. Last year, Smith Barney was buying in Florida and selling in California, said manager Thomas Gochberg. This year, the company is bypassing multifamily housing in favor of office buildings, trying to stay ahead of market trends.
The great bulk of the pension money that goes into equity property does so through a number of commingled funds which offer a share of a pool put together by real estate experts rather than a single property. They look for well-managed, income-producing properties with a good rate or return, not construction or risky ventures. Lease-back arrangements, such as shopping centers where the owner gets a percentage of gross sales, are eagerly sought. Pensions & investments puts the amount of pension money invested in real property through commingled funds at $1.6 billion PRISA fund. PRISA's annual report lists offices, industrial warehouses, hotels and motels, apartments, farms and leasebacks in 30 states plus the District. Only $75 million is in residential housing. PRISA has an $8 million leasehold interest in the Internation Club at 18th and K Streets, and a $48 million interest in the Washington and Capitol Hilton hotels.
The second largest is the Equitable Assurance Society's Separate Account No. 8, with $300 million in property. Equitable Separate Account No. 8's list of retail, office space, raw land, and research and development parks includes industrial propertyin Cockeysville, Md.
However, these two funds have ceased accepting new pension contributions for the time being for want of suitable properties in which to invest. PRISA has a weekly cash flow of $1 million or more from its existing properties that it must invest before it can accept more assets.
Among pension counselors specializing in real estate for individual funds, Pensions & Investments found only "a few of the more adventurous doing direct mortgages lending." Robert McKinney of Merrill Lynch Hubbard in New York, which manages about $55 million in morgages, is bullish on mortgages because, he says, for foreign money and commingled funds have driven equity yields down to unacceptable. levels. Mortgages, on the other hand, are yielding 9.5 to 9.75 percent at the moment.
Another enthusiast is Jeffrey Grayson, president of Capital Consultants of Portland, Ore. His firm is putting between 25 and 60 percent of its clients' funds into direct mortgages yielding from 9.5 to 10.37 percent. With 10 years experience of originating mortgage loans behind him, Grayson feels confident multipurpose projects in industrial areas, but not residential properties, are still a good investment.
Yet, according to Pensions & Investments, this type of fixed-return investment does not appear to be popular with many pension consultants. A spokesman for General Electric's pension fund, which has invested in real estate since 1954, said the fund has no plans at the moment to increase the 20 percent share of its assets, or $750 million, invested in mortgages.