James Shilling, one of nation’s foremost experts in real estate economics, finance and investment, forecast a robust year for commercial real estate in 2007 during his inaugural address as DePaul University’s new Michael J. Horne Chair in Real Estate Studies delivered at a luncheon the center hosted for more than 200 real estate professionals at the Union League Club of Chicago.

“Commercial real estate markets have now produced three consecutive years of healthy returns to investors,” Shilling observed during his Jan. 25 address. “Will 2007 be another year of strong returns for commercial real estate markets? I think it will, particularly for properties with high cash flow prospects that are selling at attractive prices.”

Shilling outlined four economic forces that indicate continued good fortune for commercial real estate this year.

“The first is we are now in the fourth year of abundant – or perhaps excess – supply of investment capital in real estate markets,” he said. “This supply of capital has proven to be very deep and to have incredible momentum.

“The second is fundamentals are strong, occupancy levels are improving, rental rates are increasing, and the economy is stable” Shilling continued. “The core consumer price index is two percent down from 3.5 percent a year ago, due to sharply falling oil prices. But still the fear is inflation could rekindle. While this fear has been keeping stocks reasonably priced, it may have created some investment demand for real estate from buyers seeking a hedge against it.

“Further, should inflation actually revive in 2007, this should only bolster the investment demand for real estate,” Shilling said.

“The third is real estate embodies characteristics of both debt and equity,” he said. “Hence, real estate prices are driven by the expectations of earnings and the interest rate environment. Short-term rates currently are higher than long-term rates. This means that interest rates should fall in 2007, which could prove a boon to real estate. But having said that, I don't believe the real estate market needs a decreased funds rate to continue its rally.

“The fourth is property prices are high both because fundamental values are high and because liquidity is high,” he explained. “Nevertheless, current price-to-earnings multiples should produce an earnings yield – the best estimator of future real returns on real estate – of about 5.8 percent, or about four percent above the Treasury inflation-protected bond rate. This is a very hefty equity premium.”

Shilling joined DePaul’s finance department faculty in January to lead the Real Estate Center’s research program, teach in DePaul’s MBA program and foster educational and research links to Chicago’s real estate community. He came to DePaul from the University of Wisconsin-Madison.

A prolific scholar, Shilling’s expertise encompasses real estate investment trusts and the role of real estate in institutional investors’ portfolios; housing finance, urban economics and affordable housing; mortgage securitization; commercial mortgage default and real estate asset pricing.

Editors’ Note: Shilling may be reached for interviews at 312/362-5921 or shilling@depaul.edu. To view Shilling’s complete address, click here newsroom.depaul.edu.