In recent decades, problems in real estate have contributed much to U.S. business downturns and have challenged financial stability.  Collapses in commercial real estate (CRE) prices sharply reduced construction outlays and—via their accompanying loan losses—induced bank credit crunches, thereby playing a large role in the recessions of 1990 and 2007-09 and the sluggish recoveries from them. 
Using quarterly data spanning a half century, our study begins by estimating how changes in taxes, interest rates, credit conditions, and capital requirements have affected CRE valuations for the four main types of commercial property. Using data covering several decades is needed because CRE activity tends to experience long cycles.  We assess the extent to which CRE valuations respond to changes in macro-prudential capital requirements and real interest rates.  We also develop models of office rents, vacancies and construction.  Our results indicate that while current high valuations of CRE primarily reflect a low real interest rate environment, the impact on office construction has been muted by less pronounced changes in existing property prices relative to replacement costs.