SAN DIEGO-Investor confidence is at an all-time high, but some investors paying ever-higher prices for commercial and residential properties may not be looking far enough ahead at some of the potential danger signs, said speakers at today's RealShare Investment & Finance conference here. While panelists expect interest rates to remain low for the near term, they do believe rates will begin to rise within the next three to four years—and rise quickly when they do—which will greatly impact buyers at refinancing if they're buying at high prices due to cheap debt.

“Apartment pricing makes me nervous because until income rises, apartment rents can't rise,” said Richard K. Green, professor /director and chair at the USC Lusk Center for Real Estate.

And income can't rise, of course, until unemployment decreases and more jobs are created, which is a serious issue, according to Dr. Sam Chandan, president & chief economist of Chandan Economics. “There is a dislocation in the labor market, which is a huge problem.” Chandan maintained that the economy is still experiencing a relatively weak recovery and that problems in the way the unemployment rate is measured (i.e., how many jobs are out there and how many people are actually looking for work) skew the results.

Other concerns are what will happen in the federal sector, previously the darling in commercial real estate. Due to the GSA mandate to reduce the agencies' office footprints universally, absorption worries are growing. Also, the fact that more government workers are now eligible for telecommuting means that even less space is needed by this sector, Kurt Stout, EVP, government solutions, for Colliers International, pointed out.

Panelists rated the economy at about a five or six on a scale of 10, indicating that we have a long way to go before we're at full recovery. In the housing sector, which experts believe correlates directly with the economy, construction has not caught up to previous levels, and “investors are betting on a boost in construction or a continued slow recovery since we've had muted construction numbers for an extended period of time,” said Pontius.

An encouraging fact is that demand exists from the 20-something and 60-something demographic groups, said Green. “Demographic demand is strong enough to drive housing for the next couple of years.” Jim Howard, SVP of Bentall Kennedy, concurred, saying that the demographic trend favors renter demand in the next five to 10 years.

But despite demand, the lack of rental growth on the horizon could be a problem for owners in the coming years. “As rates rise, to offset value we need rent growth,” said Chandan. “We need rent growth, and the fundamentals have to be the basis.” He added that valuations should not be the leading indicator of where the economy is.

In the office market, the fact that many companies are right-sizing their space use is another concern. “The fundamentals for office are not great,” said Green. “Corporate America is planning to use less space. I don't see where rent growth comes in.”

Uncertainty is still an overriding concern as well. “People are looking for certainty from our Administration,” said Ron Miller, real estate director, acquisitions, for Invesco. “But we're still the tallest midget in the circus.”

Retention remains a worry for owners, too, and not just tenants moving out of their space. “The amount of retention is a concern,” said Howard Stern, president and director of Hudson Pacific Properties. “Tenants are more and more negotiating for reduction.”