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A few months ago, we compared private and public real estate market performance over time. Our analysis showed how equity market gyrations had a bigger influence on short-term REIT performance than underlying real estate fundamentals. Indeed, private and public real estate performance (total returns) only come into alignment after four years (on a rolling-period basis).

So, REIT prices are a weak signal for private equity real estate values — or are they? Figure 1 examines the relationship between quarterly NAREIT implied cap rates, which are more stable than total returns, and MSCI-RCA transaction cap rates. Generally, REIT and private-market cap rates align over time, but periods of persistent disconnect are readily apparent — and they send an important pricing signal. In 2008-2009, private deal flow came to a virtual halt while public investors aggressively discounted REIT asset values, and these discounts were eventually reflected in private-market cap rates.

We are in a similar situation today. Transaction activity is down due to wide bid-ask spreads. Meanwhile, REIT implied cap rates have increased sharply, particularly for office space, as manifested in significant discounts to NAV. But a few distressed office asset sales suggest that REITs are on to something, and private-market devaluation will catch up soon.