After my annual foray to talk to real estate groups in Canada where lender prudence encouraged by regulator oversight has helped keep commercial property markets in equilibrium for the past two decades, I returned to the USA and read in the New York Times about how retailers like Wal-Mart and Home Depot have developed shadow banking schemes to extend credit at higher than average credit card interest rates to folks with low credit scores. The idea, of course, is to boost sales just as regulators here have tightened the screws on bank consumer lending practices to avoid the pitfalls of people buying things that they cannot afford—remember five years ago like the sub-prime mortgage crisis. And so what will happen? Many of these cash strapped buyers, who never should have been extended this credit, will eventually default on their credit card balances or consumer loans. Do we ever learn?

The answer seems to be no. In the panel discussion after my Emerging Trends presentation in New York last week one of the participants matter-of-factly stated that we were bound to make the same lending mistakes in the commercial markets, maybe sooner than later. Nobody argued as everyone noted how lenders characteristically have begun expanding loan to value ratios and reducing equity requirements. The CMBS market haltingly tries a comeback without any reforms to the practices that led to its disastrous over-lending, overleveraging bubble—ratings agencies are still paid by issuers who take loans for fees off lender balance sheets and try to sell them in packages to bond buyers who essentially don’t have a clue about the underlying collateral of the securities they are buying.

And now it appears investors flush with capital and priced out of gateway markets or core apartments head into secondary and tertiary markets “chasing yield.” This gambit can work early on for buyers of the handful of quality properties in these markets. They purchase at relatively high cap rates and can score on the income returns alone. Problems quickly follow when purchasers start driving down cap rates on more commodity properties. Thin fundamentals in these markets generally cannot support enough demand to boost occupancies or rents, and when the cycle turns down, owners get hammered. The risk magnifies today in light of the threat of interest rates eventually reverting toward the mean during holding periods, compromising exit cap rates.