Report: Eyeing the REIT Valuation/Private-Asset Value Connection

Back in May 2023, CBRE analysts noted that REITs tend to reflect broader securities market volatility (as opposed to private-equity real estate) at least, over the short term. Yet over a longer-term, four year period, that volatility tends to disappear, with the CBRE analysts advising investors to “hold REITs for several years to ensure returns are like private CRE.”

Fast-forwarding a few weeks, the analysts issued more information, asking whether REIT prices could be considered a weak signal for private equity real estate values. In discussing the relationship between quarterly Nareit-implied cap rates and MSCI-RCA transaction cap rates, the CBRE experts allowed that the REIT and private-market cap rates do align over time. However, “periods of persistent disconnect are readily apparent – and they send an important pricing signal,” the analysts pointed out.

For example, during the 2008-2009 period, private deal flow halted, while public investors aggressively discounted REIT asset values, which eventually showed up in private-market cap rates.

The CBRE experts explained that the point of all this is that we’re in a similar situation today. Transaction activity is stalling because of increasing bid-ask spreads. In the meantime, REIT-implied cap rates are on the rise. This is especially the case with office space, which shows a significant discount to net asset value. “A few distressed office asset sales suggest that REITS are on to something,” the CBRE analysts concluded. “Private-market devaluation will catch up soon.”