Public and Private Real Estate Divergence Presents Opportunity for Investors
February 7, 2023 | Edward F. Pierzak | Nareit
The U.S. commercial real estate market is amid an uncoupling. Property operational performance has generally been strong for both public and private real estate, but valuation metrics and total returns have diverged. As of the third quarter of 2022, the REIT implied cap rate was nearly 120 basis points higher than the private real estate cap rate. Total returns through the third quarter of 2022 for the FTSE Nareit All Equity Index and the NCREIF Fund Index–Open End Diversified Core Equity were -27.9% and 13.1%, respectively. These disparities have increased the attractiveness of public equity REITs, presenting opportunity for real estate investors. The dislocation between public and private real estate markets, however, is expected to close, most likely through changes in both REIT and private market valuations. Performance data from the fourth quarter of 2022 show that this valuation adjustment process already may have started. It will likely continue and follow a measured path throughout 2023.
Due to its pricing mechanism, public real estate tends to be more responsive to economic and financial market changes than its private market counterpart. REIT performance has typically led private real estate performance by 6 to 18 months.
