WESTPORT, CT—The US commercial property marketis facing an unprecedented wave of investmentcapital that portends increased competition for existingproperties and capital for new development. That bodes wellfor the commercial real estate sector in the nextfew years. But as investors ride the rising tide propertyvalues, it's important to remember that waves eventually crash, andcan wipe out the unwary.

In an ideal market, property values rise because availability ofcapital is balanced by increased demand for space. Investmentprofessionals are often concerned about economic factors that canreduce or shut off the supply of capital. By contrast, almostnobody ever worries about an oversupply of capital. But history hasshown that too much money chasing too few viable deals can lead to“irrational exuberance” that often ends badly.

Those of us who remember the incredible pace of speculativedevelopment in the late 1980s as foreign capital flooded into theUS also remember the market crash that followed, reducing propertyvalues by half virtually overnight. The tech boom and bust at thestart of the 21^st Century is another example of acapital-driven bubble that eventually burst. Although today's realestate market is a long way from these examples and may neverbecome as overheated as past markets, investors and their advisorsshould keep these cautionary tales in mind as we analyze andunderwrite deals.