Failure to Launch: Why the U.S. Commercial Property Derivative Market Has Stalled
There is a running joke within the derivatives community that at every conference, every talk begins: “U.S. commercial property is the last major asset class without a developed derivatives market.” As long as that premise remains a given, it is instructive to look at why that is the case. Why is it that in the three or so years since the U.S. property derivatives market got going, total volumes have scarcely exceeded $3 billion, a derisory amount for a potential major market? I offer six major reasons.
When the market was launched, the standard product was a tenor-based (one-year, two-year, three-year, etc.) swap, referencing NCREIF’s National Property Index (NPI) and quoted versus LIBOR — because that’s commonly how Wall Street looks at any swap. The convention, however, changed twice: once from NPI versus LIBOR to NPI versus a fixed rate because