How did CalPERS so misjudge land investments?

There's a story in the L.A. Times about how CalPERS -- the California Public Employees' Retirement System -- misjudged the California land market by investing $1 billion in a land partnership that controlled 15,000 lots along Interstate 5 in the Santa Clarita Valley.

So what happened? First, from the Times story:

CalPERS, the nation's biggest public pension fund, and its partners acquired a controlling interest in 15,000 acres of undeveloped land in the Santa Clarita Valley early last year, before the meltdown in the housing market. The land, once owned by Newhall Land and Farming Co., was appraised at $2.6 billion at the time of the CalPERS investment but has dropped considerably in value since then.

Caught in a credit crunch, CalPERS and its partners in LandSource Communities Development are in talks with a loan syndicate headed by Barclays Capital Inc. to restructure $1.24 billion in debt. LandSource received a notice of default on April 22 after missing a payment of an undisclosed amount, and a Standard & Poor's online newsletter, citing anonymous sources, predicted that LandSource would file for bankruptcy this month.

CalPERS' LandSource investment is likely to pay off in the long run as continued growth in the Southern California economy increases pressure to build north of the San Fernando Valley...

CalPERS' potential problems with developing Newhall Ranch could reach beyond current difficulties with tight credit and an economic slowdown, said Stuart Gabriel, director of UCLA's Ziman Center for Real Estate. Because of escalating gasoline prices and longer commute times, Newhall Ranch might be too far from central Los Angeles to function as a traditional bedroom community, Gabriel said.

"Residential development in the future is going to look different than in the past. We're in a new energy price environment," he said. "The emphasis is going to be on reducing commutes and carbon emissions."

The article makes some good points at the end, namely that we're now in a different environment for development planning than we were even a year ago.

Two years ago I spoke with a Wall Street fund also looking to invest in Santa Clarita Valley land, and at that time the conventional wisdom was that the area -- with a lot of local employers -- could probably ride out a downturn better than outlying areas such as the Antelope Valley or the Inland Empire. What no one counted on was the credit crunch and its aftermath, which has resulted in sharply lower land prices due to the lack of financing for both development and the home mortgages builders require in order to develop and sell homes.

Why no one saw this coming will be a great case study for the future, but to imply that CalPERS didn't due its due diligence with the best information available at the time simply isn't true. Not only will this change how communities are developed and financed, but will also undoubtedly impact the nature and scope of feasibility studies.