Andrii Yalanskyi
By Matthew Wolpert, CFA
Sagging public REITs could signal potential softening in private real estate markets over the next year.
Even as public REITs took a hit in 2022, private real estate markets were relatively buoyant. Now, new data suggest that private benchmarks may soon follow suit.
Green Street’s real-time private market benchmark of unlevered property prices fell 13% in 20221, while the NFI-ODCE index—based on appraisals and underlying funds with modest leverage—declined 5.5% in the fourth quarter of 2022 but was still up 7.5% for the year.2 With public REITs down 25% in 2022, the disconnect in public and private pricing remains relatively large.3
While much will depend on interest rates, available supply, and the length and depth of any slowdown in GDP, we believe private-market real estate values could have further to fall in 2023. Green Street data show that if private-market, unlevered IRR’s revert to their long-term relationship with corporate bonds or public REITs, private market values could decline another 5%.4
But the beauty of real estate, in our view, is that every property and market has its own story—one that broad, national benchmarks can’t tell. For example, we believe that single-family and multifamily rentals in supply-constrained markets will remain attractive investments as long-term population and migration trends support rental growth. On the other hand, ostensibly low prices for office space in urban markets where utilization remains well below pre-COVID norms could turn out to be value traps in disguise. To us, understanding the nuances of those stories is often where true value lies.
As the disconnect between public and private markets shakes out over the coming months, we believe there will be ample opportunity for long-term investors to buy quality assets at attractive prices.
Notes: (1) Green Street, as of 1/16/23; (2) NFI-ODCE Snapshot, as of 1/31/23; (3) MSCI US REIT Index (“RMS G Index”), per Bloomberg, as of 2/6/23; (4) Green Street, as of 2/2/23.
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