A bubble is forming in the country’s commercial real estate market as prices rise to increasingly lofty levels, says Washington Post columnist Steven Pearlstein.

So far, the prices have yet to scare away pension funds, foreign investors, and college endowments. These investors have continued to funnel large sums of money into REITs, private equity real estate funds, and hedge funds that specialize in real estate finance.

But, Pearlstein points out, the Blackstone Group’s recent acquisition of Equity Office Properties Trust is indicative of bubble conditions vulnerable to a downturn. That’s because 80 percent of the $36 billion deal will be financed with debt and the capitalization rate is an estimated 5.5 percent.

“It means that the lessons of the past five real estate crashes have, once again, been forgotten, and real estate has once again become a highly leveraged investment class,” he says.

He goes on to theorize that the commercial real estate bubble may burst if there is an unanticipated spike in interest rates or a sharp decline in the dollar that scares away foreign investment interests.

Source: Washington Post (12/06/06)