Wednesday, November 28, 2007

Commercial property bubble?

Commercial property may be headed for trouble, at least as far as the bond market is concerned.

Bloomberg reports that action in the derivatives market for commercial mortgage securities is reflecting increased worries of default risk and investor skepticism over the sector's strength.

Excerpt from, "Deadbeat Developers signaled by Property Derivatives".

In the bond market, commercial property investors are about as creditworthy as U.S. homeowners with subprime mortgages.

``Commercial real estate is a full-blown bubble that feels very much at a bursting point,'' said Christian Stracke, an analyst in London at CreditSights Inc., a fixed-income research firm.

``There's a fairly toxic mix of factors at work.''

The cost of derivatives protecting investors from defaults on the highest-rated bonds backed by properties more than doubled in the past month, according to Markit Group Ltd. Prices suggest traders anticipate defaults rising to the highest level since the Great Depression, according to analysts at RBS Greenwich Capital in Greenwich, Connecticut.

Sentiment is turning on the once hot commercial property market.

I don't know if this is a case of piling on by traders and the media after investor Andrew Lahde, recently noted for his firm's stellar subprime short-driven returns, voiced his dour outlook on commercial property-backed loans. Or could it be that this market's number really is up?

Well, I'm no expert here, but let me introduce you to someone who is.

Meet Sam Zell, noted property investor and recent seller of Equity Office Partners (to Blackstone for $39 billion).

Zell spoke to Bloomberg in a 21 minute interview segment earlier in the year about the sale of EOP to Blackstone, and the property market in general.

He was gracious about not calling a top in the property market after completing the EOP deal, noting its merits from the perspectives of both sides in a seperate interview with

In fact, he recently offered the opinion that rents from commercial property represent "income from bricks and mortar" that investors will increasingly want in the future. Zell also said that the monetization of real estate assets is a trend that has only started.

So there you have it. One seasoned investor's view of the long-term trends affecting commercial property. Does this mean that current worries over the state of the commercial property market will prove to be nothing more than a prelude to a short-term shakeout?