Click the link above to access all EA Insights

Highly liquid, publicly traded REITs can provide a real-time outlook for where private real estate asset values are headed.

Figure 1 compares the relationship between REIT-implied cap rates (horizontal axis) and transaction cap rates from MSCI Real Capital Analytics (vertical axis) during the past two decades. During the recent downcycle, the all equity REITs implied cap rate did not rise as high as during the previous cycle primarily because underlying fundamentals remained in good shape for most sectors, except for office. Nevertheless, the liquid REIT was far quicker to discount than private real estate markets in the wake of higher interest rates.

Today, expected falling interest rates and continued economic growth means that the public markets are pricing-in future cap rate compression. As such, REIT-implied cap rates are trending back below private market valuations (e.g., moving to the left of the 45-degree line). In both 2003-04 and 2010, the REIT market foreshadowed a downtrend in private market cap rates. We expect such a foreshadowing to recur in 2025.