Why are REITS Currently so Expensive?

For the last several years, the price of listed real estate stocks has been unusually high relative to dividends. We explore whether low interest rates or low risk premia can account for the high valuation ratios and find that they cannot. Lower interest rates have been offset by rising risk premia to keep expected returns close to average. Instead, the market has priced in future income growth on commercial properties that is far above the growth rates seen in the data. High implied growth rates hold across traditional REIT sectors, but are less extreme for non-traditional REIT sectors. Income growth expectations are also less extreme for an index of international listed real estate. Investors who ignore the recent increase in interest rate risk that we document would need to hold lower, but still unusually large income growth expectations