Real Estate Cap Rates and the Slow Wheels of Progress
June 20, 2023 | Edward F. Pierzak | Nareit
Differences in cap rates capture the divergence that occurred between U.S. public and private real estate markets in 2022, with public real estate cap rates (REIT implied) higher than their private real estate counterparts (transaction and appraisal). As expected, the gaps between REIT implied and transaction cap rates have been narrowing through time, with changes in both REIT and private market valuations.
While welcome news, these transactions account for a mere sliver of private real estate capital. Appraisal cap rates, which represent the bulk of private capital, have shown little movement since the end of 2021, resulting in differences between REIT implied and appraisal cap rates remaining wide. Closing these gaps will likely take time and further material private real estate write-downs. Although transaction cap rates demonstrate progress in the price discovery process, appraisal cap rates highlight that the wheels of progress turn slowly…
