WESTPORT, CT—The US commercial property market is facing an unprecedented wave of investment capital that portends increased competition for existing properties and capital for new development. That bodes well for the commercial real estate sector in the next few years. But as investors ride the rising tide property values, it's important to remember that waves eventually crash, and can wipe out the unwary.

In an ideal market, property values rise because availability of capital is balanced by increased demand for space. Investment professionals are often concerned about economic factors that can reduce or shut off the supply of capital. By contrast, almost nobody ever worries about an oversupply of capital. But history has shown that too much money chasing too few viable deals can lead to “irrational exuberance” that often ends badly.

Those of us who remember the incredible pace of speculative development in the late 1980s as foreign capital flooded into the US also remember the market crash that followed, reducing property values by half virtually overnight. The tech boom and bust at the start of the 21^st Century is another example of a capital-driven bubble that eventually burst. Although today's real estate market is a long way from these examples and may never become as overheated as past markets, investors and their advisors should keep these cautionary tales in mind as we analyze and underwrite deals.