Next Bubble? How About Commercial Property:
Chris Mayer / August 9, 2007

There is always a bubble someplace. My nomination: Commercial real estate. This chart from the Wall Street Journal tells you all you need to know about commercial real estate.

But to set the stage: a capitalization rate is like an inverted price-earnings ratio. So, low cap rates generally indicate a property is expensive and high cap rates generally mean something is cheap.

Now, take a look at this chart:

Wow. Falling cap rates mean rising property prices – just as expanding price-earnings ratios mean higher stock prices. And here we are, with years of falling cap rates on office and apartment buildings. They can’t get much lower. The 10-year Treasury rate is right underneath it.

But they can go much higher. And that means real estate prices can go much lower. — Chris Mayer

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