Markets tend to myopia in times of extreme optimism. Risingprices fuel a brighter outlook, drawing additional capital and morefavorable credit terms. For a moment, a market’s momentum canoverwhelm the inertia of rational behavior. Prices decouple fromfundamentals. This pattern might describe any sector. Inspecifically describing the last decade's upswing and downturn incommercial real estate, property markets have earned their peeragewith other mainstream asset classes over the last decade.

Leading up to the peak of capital inflows to the sector, theassessment of risks associated with lending against commercialproperty adjusted in favor of current metrics and away fromlong-term cyclical measures. Some lenders offered crediblearguments that structural changes in the industry meant that morerecent data was more relevant. For other lenders, the bias indefault and loss expectations did not reflect a greater tolerancefor risk; in many cases, it simply reflected a basic mismeasurementof those risks in a worldview where defaults and losses could beobviated by the resilience of a positive and uninterrupted pricingtrajectory.

In the early stages of the commercial property boom, regulatorsand policy makers voiced concerns about the industry's capacity tomeasure and mitigate attendant risks. These concerns were difficultto quantify, and remain so. As Brad Case pointed out in a 2003white paper prepared for the Federal Reserve's work on Basel II,"An especially challenging limitation has been the paucity ofloan-level data covering multiple CRE credit cycles." These datalimitations continue to confound the modeling of default and lossat the full range of regulator bodies, research firms, and ratingsagencies.