Commercial Real Estate Blog

Money market funds work by maintaining a nav of $1.00 and issuing a market rate yield. That’s the theory anyways, and now the Primary Fund by Reserve has said that the value of investor’s money has dropped below the $1.00 mark to about $.96-.97 cents. This is apparently only the second time in history for this to occur in the United Sates.

Late last year we wrote on an “enhanced cash” fund that broke the $1.00 market and now what is generally considered to be one of the safest forms of investments, money market funds, have shown that they too are susceptible. Citing large losses on what is now worthless paper issued by Lehman Brothers, the fund will undoubtedly not be the last.

Rapidly deteriorating confidence in equities, real estate, bonds, and now money market funds leaves one wondering how much farther up the food chain we can go. Wherever the bottom ends up being, the reversion to normalcy seems to be getting farther and farther out with each new economic maelstrom we hit.

The Royal Bank of Scotland’s (RBS) chief credit strategist Bob Janjuah has issued a report to its clients to be prepared for a global credit and equity crash. Bob Janjuah forewarned against last year’s looming credit crisis. According to his report, the next three months will be nasty.

The report includes warnings that the S&P could fall by more than 300 points to 1050 by September. In debt markets, they are forecasting that both the high grade and low grade iTraxx indexes could soar. This index is a European index designed to allow people to trade the “Riskiness” of European debt, with the US having a seperate set of similar indexes as well.

What is key in the report has to do with inflation, the fed pumping money into the market, and what needs to be done about it. All the money being pumped into the market by the Fed is causing headline inflation to increase. Unfortunately we find ourselves in economic conditions which don’t easily allow the raising of interest rates. The economy, both domestic, international, and emerging markets will then be faced with further tightening of credit causing global growth to cool significantly.

The impact on commercial real estate could be significant; you would have the cost and availability conditions of debt to continue to deteriorate, coupled with the fact that risk premiums will have increased in other asset classes. This would suggest a similar jump in expectations for commercial real estate, which translates into higher cap rates and tighter, more conservative underwriting from institutions. Things are trending in that direction, and RBS’s report could suggest that we’re aways away from any reverse.