CRE Price Discovery


Valuations & Investment Psychology

Price discovery in commercial real estate (CRE) is influenced by a range of factors, including investment psychology, the balance of risk and reward, expectations about economic growth, and more. For real estate transactions to take place, equity and debt providers must have enough confidence in where the market is heading to properly underwrite, or forecast, cash flows that meet their required return thresholds. This process involves constant, day-to-day analysis.


At the heart of confidence in real estate valuations and future projections lies the stability of risk-free markets, particularly the treasury markets. U.S. Treasury bills and bonds are seen as risk-free fixed income assets because they are backed by the full faith and credit of the U.S. government, which guarantees timely payment of both interest and principal. Without a sense of stability in these risk-free assets, it becomes nearly impossible to accurately assess returns or price risk in real estate.


Both real estate investors and others in the market seek rewards that adequately compensate them for the perceived risk involved in earning those returns. This is the fundamental principle of investing, where risk and reward are often seen as a 1:1 relationship. In theory, no investment should offer higher returns for less risk compared to another asset with the same level of risk. When such opportunities do appear, they are often considered “mispriced” or “undervalued” assets—and these are the opportunities investors actively seek out.


Given that risk and return are inherently relative, changes in risk-free yields influence investors' expectations for alternative investments, such as private real estate. Real estate investments require a higher return than fixed income due to the greater risks involved such as physical depreciation and severe weather, to name a couple. The risk-return spectrum within real estate is broad, varying by asset class, submarket, asset grade, and size.


In general, the more liquidity or capital available for an asset, the lower its capitalization (cap) rate will be. Cap rates and risk are inversely related. Assets that attract the most demand typically see investment from those with the lowest cost of capital or return expectations, as their goal is often wealth preservation with minimal risk. Investors in this category include institutions, pensions, endowments, and Real Estate Investment Trusts (REITs). These investors aren't always seeking to maximize returns; rather, they prioritize security. On the other hand, retail or individual investors often demand a higher return to justify the risks associated with real estate investments. In these cases, sponsors must ensure that the higher return requirements are met by purchasing at higher cap rates, or having the opportunity to build to a higher cap rate through the execution of a value-add business plan.


Without confidence in investor appetite and return expectations, buyers are unable to determine the price they can pay for a real estate asset. The price they are willing to pay is simply a reverse-engineered result based on the return requirements of their equity partners, considering the cost of debt tied to the asset, and the relative opportunity cost of investing for anticipated returns elsewhere in the market.


Investor confidence and appetite are shaped by the yields on risk-free assets, which in turn serve as a benchmark for assessing the premium required to invest in riskier alternatives. When risk-free assets experience volatility—as has been the case in recent years—the market as a whole stagnates due to a lack of confidence, leading to a slowdown in transactions.


Ultimately, it is investor expectations, including their emotions, that drive the flow of capital in the market and influence asset valuations. So, when someone suggests that emotions don't factor into commercial real estate, they’re missing a crucial point. All predictions and models for the future, although based on objective data, are influenced by subjective investor psychology. For example, in a liquid market (suggesting a stable credit or treasury environment), demand for class A multifamily properties in core growth markets is abundant. The buyer who ends up winning the deal often must pay a higher price than their underwriting suggests they should just due to the fierce competition they are up against from other parties. So while initial bids or offers may be pegged to stricter underwriting, the winning bid may be somewhat detached from the fundamental underwritten cashflows, and the growth of those cashflows. In these instances, investors may accept or buy into the fact that growth will be higher in the future than previous or current data suggests - just to win the deal.


Investing is simply educated betting about the future. Now, you can better demonstrate the relationship between investor psychology, emotions, and CRE valuations.

Building to Hold vs Building to Sell

By Christian O'Neal • July 31, 2025
Why Building and Holding Real Estate for the Long- Term Delivers Superior, Tax-Efficient Yield 

Rent Control - Does it Work?

By Christian O'Neal • July 31, 2025
Rent Control: A Well-Intentioned Policy That Misses the Mark In the debate over affordable housing, few policies stir as much emotion—or controversy—as rent control. Advocates see it as a way to shield tenants from rising rents. Critics argue it does more harm than good. When you examine the economic evidence and real- world outcomes, the conclusion becomes clear: rent control is a deeply flawed solution to a real problem. What Is Rent Control? Rent control is a policy that limits how much landlords can increase rent, either through caps tied to inflation or fixed annual percentages. On paper, it sounds compassionate: protect renters from displacement and make cities more affordable. But in practice, rent control reduces the supply of available housing, discourages new development, and often hurts the very people it's meant to help. Why Rent Control Backfires 1. It Discourages New Construction Developers are less likely to build in markets where future rent growth—and thus returns—are capped. Why take the risk of developing multifamily housing in a city where your upside is limited and your operating environment is politicized? 2. It Drives Property Owners Out of the Market Faced with strict rent regulations, landlords may convert rental units to condos or remove them from the market altogether. Fewer units mean more scarcity, which ultimately drives prices higher for everyone else. 3. It Distorts Housing Allocation Rent control encourages long-term tenants to stay in apartments they might otherwise outgrow or vacate. This locks up valuable housing stock and prevents more dynamic turnover, often freezing lower-cost units in place for higher-income tenants. 4. It Creates a Two-Tiered Market Markets with rent control often develop into two separate ecosystems: regulated apartments that are underpriced and hard to find, and unregulated units with inflated prices to compensate for suppressed supply. The California–New York Split: A Tale of Two Approaches Historically, California and New York have been peers in over-regulating rental housing. But recently, they’ve taken different paths: California's Recent Steps Forward:  Voters rejected rent control expansion (Prop 21 and earlier Prop 10)  Streamlined approvals and reduced CEQA abuse to promote new development New York's Recent Moves Backward:  Passed “Good Cause Eviction” law—effectively rent control in disguise  Political calls for rent freezes and demonization of landlords If you’re an open-minded apartment developer evaluating both markets today, California’s message is increasingly: We need you. New York’s? Not so much. To be fair, both are still difficult places to build housing, and cities like Los Angeles and Berkeley remain deeply anti-development. But California has shown progress by recognizing that you can’t claim to be pro-housing while simultaneously vilifying those who create and operate it. A Misalignment of Incentives A core problem with rent control is that it treats housing supply as fixed and ignores the private sector's role in expanding it. If developers and operators are stripped of potential upside—and burdened with unpredictable political risk—they simply stop building. Even well-intentioned pro-development plans (like NYC’s "City oare undermined when operators believe they’ll be punished after delivery through hostile regulation or public scorn. You can't be truly pro-development unless you're also pro-operator. Policies that foster collaboration, not scapegoating, create the conditions for long-term affordability. The Real Way Forward Instead of imposing artificial caps, cities should focus on increasing housing supply through zoning reform, expedited approvals, and public-private partnerships. The more units that come online, the more pricing power shifts away from landlords and toward tenants—naturally. Rent control is seductive in its simplicity but devastating in its consequences. It’s a policy that tries to solve a supply problem with demand-side restrictions—and in doing so, it often makes things worse. At Alpha Equity Group, we believe that smart, sustainable development is the key to housing affordability. And that requires sound economics, not political theater.

Into the Future – Making Sense of Rates in a World That Doesn’t

By Christian O'Neal • June 24, 2025
In the world of capital markets, clarity is often fleeting — and today, it feels downright elusive. The Federal Reserve’s latest June dot plot offered little in the way of certainty. While the median projection sees the Federal Funds Rate in the mid-3% range by the end of 2026 , the dispersion among voting members is striking. Seven members predict no rate cuts in 2024 , reflecting just how divided the committee remains in the face of conflicting data. This latest update marks a 25-50 basis point shift downward from May , but the overarching theme is one of caution, not conviction. That sentiment is mirrored in the economic projections. Core PCE inflation , the Fed’s preferred inflation measure, is now expected to end 2025 at 3.0% , 30 basis points higher than earlier forecasts. Meanwhile, real GDP is forecast to slow from 2.3% in Q4 2024 to just 1.7% in 2025 — another sign that the lagged effects of monetary policy are expected to begin to show. At the same time, the Fed’s balance sheet has shrunk dramatically, from a peak of $9 trillion in April 2022 to just $2.3 trillion today . That quantitative tightening, coupled with a lack of consistent inflation suppression, leaves both equity and bond markets vulnerable to further volatility. This all feeds into an uncomfortable truth: rates are likely to remain higher for longer , and the market is struggling to price that reality. The VIX index , a 30-day forward-looking gauge of volatility in equities, is trending higher. When volatility rises even as indices fall, credit spreads widen , liquidity tightens, and financing risk surges. For commercial real estate investors , this has enormous implications. As we explored in our recent article on CRE Price Discovery , the market remains in flux. The bid-ask spread in real estate is still somewhat wide, and most transaction activity today is being driven by maturing debt — not opportunistic investments banking on future growth. This means valuations are being forced downward, especially for assets that were purchased or refinanced at ultra-low rates in 2021–2022. Consumer behavior is also in transition. Household formation is slowing, and personal savings rates are slowly ticking up although they are significantly down from longer term averages – which could reflect folks bracing for economic turbulence. U.S. household formation currently stands at 1.058 million, down 7.68% from last month’s 1.146 million and down 47.73% from 2.024 million a year ago. Looking globally, demand for U.S. Treasuries remains a critical economic indicator that has trickling effects on the economy . A strong bid-to-cover ratio — like the 2.67x seen at the June 11th 10-Year Treasury auction , with nearly 88% of bids from foreign banks — is encouraging. It suggests continued faith in U.S. fiscal credibility and currency strength despite market apprehensions in our strength, such as the US credit rating being downgraded by Moody’s. This equilibrium is rather fragile. Should the U.S. continue to run massive budget deficits with a debt-to-GDP ratio north of 120% , investors may begin to demand higher yields — or worse, seek refuge in alternative stores of value. Gold is one such store. The World Gold Council recently reported that 76% of central banks expect to increase their gold holdings over the next five years , up from 69% in 2023. This flight to real assets reflects growing concern about the long-term value of fiat currencies — and a desire to hedge against systemic risk. The Bottom Line  Rates are likely to remain high through 2025 and into 2026 Inflation remains persistent but progress has been unclear Growth is slowing, and volatility is rising Real estate is repricing around debt maturity events Global capital is shifting cautiously, looking for safety At Alpha Equity Group, we believe this is a time for discipline, not risk-taking. We’re staying patient, watching the data, and investing defensively — focusing on secured debt positions and capital preservation. While others chase uncertain upside, we’re building long-term value through downside protection while we wait out the convergence of dozens of factors completely outside our control.
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