“Low interest rates, a volatile stock market, expectationsof an improving economy and a cyclical bottoming for commercialreal estate fundamentals should drive investment activity andvalues higher.” This statement, not too far off from the currentmood of the market, was the industry sentiment in 2002 as theUnited States began to recover from recession, the 9/11 tragediesand corporate scandals. Five years later, the composite index ofcommercial property values had soared 53%, an unprecedented andunsustainable trend driven by unusual – and eventually – damagingfactors.

The investment market drivers for the past decade may providesome guidance as to what may unfold in the future. The underlyinghope is for a return to fundamentals-based capital flows leading toless volatility and a more orderly creation of value in themarkets. History tells us that markets are seldom orderly, so whatis in store for investors over the next few years? Competitionamong capital sources in a low-yield environment led to dangerouslylax underwriting standards across all assets, particularly in theU.S. real estate market. CRE sales volume nearly tripled from 2000to 2007, pushing the overall price index up 60%. The GreatRecession followed shortly thereafter, causing a 79% drop in salesvolume and an estimated 40% drop in values on average from peak totrough. As a result, the lending pendulum swung too far to theextreme, shutting off credit to consumers and businesses all overthe world. Broader availability of financing is needed to normalizethe economy and real estate markets.

The threat of bubbles is still a major concern as the dramaticmovement of capital in and out various assets continues. Recently,worries about the bond, gold and raw materials markets havedominated headlines, and as the tide between risk and opportunityebbs and flows capital rotation could be radical at times. CRE isnot immune to these flows and as it gains broader favor, priceswill appreciate with, sometimes with extreme unevenness.Competitive and improving cash yields will become a major draw aswill the advantage of real estate as an inflation hedge once therecovery kicks into gear. However, differentiation of pricing byquality and fundamentals-based rent growth projections amonglenders and buyers are likely to remain part of the equation.Adding new supply will be more difficult and expensive in the nextcycle, especially for the harder-hit segments: office and retailand assets located in secondary/tertiary locations While thiswill not prevent mini bubbles, it should support the case for arising but smoother value-trend line over the next 5 to 7years.