Commercial Real Estate

Abstract

The spread of mortgage securitization and a decline in business-cycle volatility have reduced the traditional risks of holding commercial real estate. These secular factors, in turn, have contributed to record property valuations. Investors seem willing to pay higher prices for the same cash flows because they believe they can borrow at lower rates and count on stable cash flow from commercial rentals in a climate of comparative certainty. The result has been a sharp compression of the risk premium on commercial real estate. No doubt, this phenomenon will in part prove to be cyclical. However, the evidence suggests that, long term, the commercial real estate risk premium will remain below its historical average.