Economists interviewed by Urban Land Magazine are raising concerns that commercial real estate valuations are not fully aligned with today’s risk and cost environment. They point to the influence of Federal Reserve policy, climate-related risks and rising insurance expenses as key pressures on pricing that are not yet completely embedded in current asset values.
Michael Acton, managing director and head of research at AEW Capital Management, said valuations should represent investors’ best view of risk and return based on the information available at the time. He noted that, in recent years, U.S. commercial real estate investors have been operating with a degree of information inefficiency. According to Acton, below-average transaction volume has limited effective price discovery, leading to a less precise understanding of how and where commercial real estate fits into the broader economic and capital markets cycle.
Other economists highlighted a different imbalance in today’s pricing. Chad Littell, national director of U.S. Capital Markets Analytics at CoStar Group, suggested that investors may be overemphasizing current elevated vacancies and higher interest rates while underappreciating potential future improvement. He said the market may be surprised by how quickly property fundamentals can strengthen once new supply slows significantly, implying that today’s valuations may understate eventual income growth for certain assets.
Interest rate movements are another focal point for valuation risk. Kiran Raichura, head of commercial real estate economics at Capital Economics in London, pointed out that since the end of 2021, the U.S. 10-year Treasury yield has increased by nearly 300 basis points, while the all-property capitalization rate has moved up by about 85 basis points. As a result, the yield spread between Treasuries and all-property cap rates has narrowed to near zero, compressing the traditional premium that real estate investors expect over risk-free rates.
From a strategic perspective, some commentators argued that investors should spend less time debating whether current pricing is precisely fair and more time assessing long-term replacement costs and resilience. Josh Scoville, global head of research at Hines, compared today’s pricing environment to driving while looking in the rearview mirror, saying investors know where prices have been but not where they are headed. He suggested that a more relevant question is how difficult it will be to replace an asset five years from now, rather than whether today’s price is optimal.
Valuation practice itself is also under scrutiny. Joseph Crescio, global head of real estate valuation at Manulife Investment Management, emphasized that key assumptions such as growth rates, discount rates and terminal cap rates are judgment-driven and often based on averages. He said accuracy depends heavily on the specifics of the asset and submarket, along with any prior markdowns and the rigor of an institution’s valuation framework. Taken together, the economists’ comments indicate broad agreement that current commercial real estate pricing is still adjusting to a rapidly changing risk, rate and cost backdrop.
