Commercial property has been a very popular asset class over the last decade. Investors who were spooked by the equity market dot-com crash were encouraged to invest in commercial property. Investors were encouraged to speculate on a form of "carry trade"- borrow at historic low interest rates and lease the property to take advantage of high rental yields and capital growth (a return on their principle). Add to the mixer, globalisation and the ability to move money globally for very little cost; this strategy presented very attractive opportunities.
The last 18 months has seen cheap financing dry up and the global economic recession has driven up vacancy rates. The well publicised collapse of the residential property market has masked the time bomb that is the commercial property market. The commercial property market has many parallels to the residential property market, including the mass securitisation of property loans (CMBS). With rising delinquency rates, there is potential for the securitised CMBS market to collapse like the residential MBS market. In recent times, there has been chatter from commercial real estate investors and banks that we may have another round of large losses due to this. The potential for losses have been estimated to around $200-300 billion for US banks, and European banks are heavily exposed also. With soaring delinquency rates across Europe and Asia, the potential for this market to cause havoc world-wide remains very strong.
The collapse of the residential property market, and draw strong parallels with the commercial market. If economies suffer a prolonged period of contraction, and delinquency rates continue to rise, we may see panic in the CMBS markets. This will be a disastrous event, and could lead to another bout of strong credit contraction. With interest rates already at historic lows, there remains little in the central banks' armoury to deal with this.
Hints of a prolonged economic contraction will signal danger, and a collapse of the commercial property and CMBS markets may lead us into a period of economic depression- as a worst case scenario. Commercial property recovery takes many years, maybe decades (take the Japanese example- commercial property prices are still at 45% to their early 1990s peak).
This will send Equity Markets down past the March lows - unavoidable if a Depression comes about and with USA GDP down a further 1% in this last quarter its not long before Depression comes true (GDP contracting by more than 10%).
Evidence for this was sourced from FUTEX and other sensible comentators.
Does the above look good to you!?
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