Offices Up, Rents Down

One of the few resonant sentences in the new Basel Accord - a document which mostly reads as if it were written by a committee (as it was) - concerns commercial real estate:

In view of the experience in numerous countries that commercial property lending has been a recurring cause of troubled assets in the banking industry over the past few decades, the Committee holds to the view that mortgages on commercial real estate do not, in principle, justify other than a 100% weighting of the loans secured.

Right on cue, CRE is again springing into the prescribed line as a cause of troubled assets. The Economist points out:

From up high, London is a picture of vigorous renewal. In just about every direction, construction cranes point contemplatively to the skies. They also point to the great boom that has taken place in commercial property in recent years. The collapse of that boom, which now threatens to slash the values of these gleaming office towers and destroy the savings of millions, may pose almost as great a threat to Britain's banking system as the subprime crisis that has been roiling financial markets since late in 2007.

What is interesting is the extent of the downturn indicated by the IPD forwards. These provide an indication of where commercial real estate derivatives market participants are willing to trade on a forward basis - and they forecast a 30% fall over the next three years. Thirty, not three. That's one thing Basel got right then...