NEW YORK CITY—Investment in US commercial real estate this year is expected to be underpinned by two key themes: the advanced state of the cycle and the global macroeconomic backdrop, “which is funneling capital into US assets,” write TIAA-CREF's Martha Peyton and Edward F. Pierzak. But volatility is an important aspect of that macroeconomic backdrop and will also figure in the CRE environment as the year progresses, point out the authors, both managing directors with TIAA-CREF Asset Management.

“Volatility itself is not a threat to the solid US commercial real estate performance expected for 2015,” write Peyton and Pierzak. Instead, the authors describe it as “a catalyst that could ignite disturbances in real economic growth or financial market liquidity that would affect real estate later. The return of volatility is therefore a signal for real estate investors to examine their taste for risk and prepare for eventualities.”

How vulnerable the US economy, and therefore CRE, is to shocks “is implied in the pattern of volatility across various sectors and markets,” the authors write. “Phases of high volatility are associated with heightened vulnerability because volatility creates big winners and big losers. While the macro-economic impact should be a wash, the losers sometimes do enormous damage.”

Even aside from the social and political unrest that has made headlines across the globe in the past few years, the latter half of 2014 saw a sharp uptick in volatility, Peyton and Perzak point out. Among the ways in which volatility manifested itself were: deterioration in economic conditions across the euro zone, a nosedive in investor appetite for emerging markets' sovereign debt, the 50%-plus decline in oil prices and a steep drop in investor appetite for US high yield bonds, causing spreads to widen.

“The last item, US high yield bond spreads, is strongly associated with CRE pricing,” the authors write. “Our cap rate spread model views the uptick in US junk bond spreads as another indicator that prospects for further cap rate compression are limited” for the balance of this year.

That's the case even as other, more positive domestic macroeconomic indicators support expectations for further cap rate compression. In fact, write Peyton and Pierzak, “the potential is limited, especially for higher-quality properties in more desirable locations.”

That leaves CRE performance more dependent on NOI growth. A combination of US economic growth that was just good enough, coupled with limited development, resulted in strong NOI growth across commercial property sectors. “It must continue this year to support expectations for ongoing strong CRE performance,” the authors warn. The economic outlook described above seems to assure that outcome, but the real world might not cooperate.”

The drag on economic performance outside the US leaves the domestic economy more vulnerable to shocks, Peyton and Pierzak point out. And if the US economy is more vulnerable, “so is US CRE.”

A commercial real estate cycle, the authors write, “has no expiration date and does not die of old age. It typically ends when external shocks crash into imbalances that have accumulated slowly over time. Over-building, over-lending, over-buying, and over-leasing are CRE imbalances that have characterized past downturns. When external shocks collide with CRE imbalances, property values and NOI growth suffer.”

At present, the authors see “no reason for worry” in terms of such imbalances. Rather, they write, “the concern is more indirect in that shocks to the US economy could compromise US CRE performance rather than derail it.”