Real Estate
Home›Real Estate›Commercial›Commercial real estate valuations lag true costs and r…
Commercial real estate valuations lag true costs and risk, experts say
Experts point to higher insurance costs and Fed-driven rate moves, as well as weaker price discovery from below-average transaction volume.
ConnectCRE highlights concerns that U.S. commercial real estate valuations are not fully reflecting current borrowing costs and risk factors, with recent pressures including Federal Reserve policies, climate-related risks, and rising insurance expenses.
Citing comments collected by Urban Land, AEW Capital Management said investors have operated for several years with information inefficiency linked to below-average transaction volume, which reduces effective price discovery and can distort how CRE fits into the economic and capital market cycle.
CoStar Group added that investors may be overestimating today’s elevated vacancies and interest rates, rather than accounting for potential fundamentals improving when new supply slows. Capital Economics said that since the end of 2021 the 10-year Treasury has risen by nearly 300 basis points, while the all-property cap rate has increased by 85 bps, leaving the yield spread close to zero.
Hines characterized current CRE pricing as similar to driving while looking only in the rearview mirror, and said investors should focus on how hard it will be to replace an asset five years from now. Manulife Investment Management also emphasized that judgment-based assumptions used in pricing, including growth rates and discount and terminal cap rates, remain central to valuation outcomes.