NEWPORT BEACH, CA—As cap rates continue their descent, commercial property pricing continues to move in the opposite direction. That's the word from Green Street Advisors, which said Thursday that its monthly Green Street Commercial Property Price Index inched higher in October.

The index, which slipped below 62 in the summer of 2009, now stands at 112.709999, marginally higher than it was in September and now at the highest level since the research and consulting firm began keeping track. Green Street notes that property appreciation has been strong recently and values in all major property types are now above the levels reached in 2007. The index, which values properties owned by REITs, uses pricing in August '07 as its baseline.

“Strong demand for income-producing assets has pushed cap rates lower,” says Green Street analyst Peter Rothemund. “And we may see further moves down. Real estate pricing continues to look attractive when it's compared to the low returns that investments in corporate and government bonds currently generate.”

In many quarters, not least among investors, the continuing limbo-pole dance of cap rates is being watched with concern. In its latest Global Capital Trends report, Real Capital Analytics notes that in the Americas and particularly the US, “Cap rates are testing historic lows, causing increasing speculation of a potential pricing bubble. To refute this, the argument is that that the spread between cap rates and interest rates remain very wide historically, a valid point.”

Also valid, RCA says, is the view that historic spreads may no longer be relevant “since interest rates are disconnected from traditional market forces” due to the Federal Reserve's intervention. “Real estate investors are speculating on central bank policy as much as on market fundamentals. This factor alone may be cause enough to justify the wide spread, or risk premium, in the current market.”

Underlying the speculation of a pricing bubble, according to RCA, is “the near certainty that interest rates will go up… eventually. The presumption that that cap rates will rise and property prices will fall is by no means a certainty. The relationship between interest rates and cap rates is far more complex,” with factors of timing and driving forces the key points to consider in the current market, RCA says.

Interest rates could rise for “virtuous” reasons—such as a growing economy producing more jobs and higher wages—or the driving factors could be fear-based ones, i.e. “a market-wide re-pricing of risk from unexpected shocks, financial or otherwise,” RCA says. The hope, of course, is that when rates rise, the increase will be for virtuous reasons; conversely there's a risk that they'll stay too low for too long. “No matter when or why rates go up, a great deal of risk in the market evaporates when interest rates rise and become governed more by market forces and less by central banks,” according to RCA's latest report.