The U.S. commercial real estate market moved from hot to "on fire" in the third quarter this year, according to a new Real Estate Research Corp. report that draws several parallels between current market trends and those of pre-recession 2007.

An increase in "undisciplined off-shore" capital is pressuring the commercial real estate prices in the United States to escalate, particularly in secondary and tertiary cities. Additionally, the RERC report – titled "Prices Pressure Values" – juxtaposes the increase in available capital with the loosening of underwriting standards, i.e. a commercial bank's own rules governing debt and lending.

While the report's authors offer up cautionary data, they also soften the information by pointing out several regulatory standards and market conditions that are in sharp contrast to those of 2007.

"As the commercial real estate market shifts from being hot to being on fire, there is increasing concern over the prices investors are pay­ing, as well as the risks that lenders are taking on," wrote Constantine Korologos, managing director of Situs, the parent company to RERC. "It is normal to be apprehensive, but investors should be careful not to confuse where we were seven years ago with where we are today."

Korologos appears to be spurring his readers toward continued investment by outlining the differences between the present environment and the mistakes of our recent past that led to the meltdown:

  • "At the beginning of November 2014, commercial mortgage-backed securities (CMBS) issuance year-to-date was approximately $79 bil­lion. That is an increase of 10.6 percent, or $7.6 billion, compared to the same period last year. With nearly 2 months to go yet before the end of the year, the com­bination of deals priced and still in the pipeline makes it increasingly likely that CMBS issuance will reach close to $100 billion in 2014. And while reaching that would be a substantial increase in issuance over 2013, it pales in comparison to the peak of over $230 billion of CMBS issued in 2007.
  • There is an absence of an aggressive mar­ket for collateralized debt obligations (CDOs). The CDO market was a multi-billion dollar market, and for a few years prior to the Great Reces­sion, it was a financing mechanism for the most junior CMBS bonds. Extremely complex CDO structures were created... Real estate CDO issuance peaked in 2006 at $40 billion; it was $3.4 billion in 2013. Sec­ondly, the subprime residential market, which exacerbated the crisis in 2007, is currently very minimal and should have little effect in today's environment.
  • The financial market has also been systemically altered through the Dodd Frank Act as well as Basel III. These laws increased the mini­mum capital requirements as measured by common equity, which also must take into account risk-weighted assets for large bank hold­ing companies. The bank holding companies must also have capital conservation and counter-cyclical buffers, and requirements have been set up to mitigate risks via minimum liquidity ratios and lever­age ratios."

In the end, Korologos says rising liquidity and competition are positive signs, but reminds investors to keep their eyes open and remember market basics: supply and demand, and vacancy, rental, yield, interest and cap rates.