The lingering public-private real estate valuation divergence has been disruptive, but it continues to offer potential buying opportunities for investors. Recent data from Nareit’s quarterly REIT Industry Tracker and National Council of Real Estate Investment Fiduciaries (NCREIF) show that, on average, REITs have maintained occupancy rates akin to or higher than their private real estate counterparts across the four traditional property types.
They have also remained attractively priced compared to private real estate. Today, REITs appear to continue to offer more for less in the real estate space; a particularly appealing proposition for investors that appreciate good value.
The chart above displays a scatter plot of public and private real estate capitalization (cap) rates and occupancy rates for the four traditional property types—apartments, industrial, office, and retail—as of the fourth quarter of 2024. Data from Nareit’s quarterly REIT Industry Tracker and NCREIF are used for the public and private real estate measures, respectively. The NCREIF data solely focus on properties from Open End Diversified Core Equity (ODCE) funds.
REIT occupancy rates were greater than their respective NCREIF ODCE occupancy rate counterparts across all the examined property types except industrial. Focusing on the differences between public and private real estate occupancy rates, retail and office had the largest differentials at 4.1% and 4.0%, respectively. The apartment occupancy rate difference was 1.9%. The industrial gap was negative, but both public and private industrial properties posted notably high occupancy rates exceeding 95%. The high and higher REIT occupancy rates may simply be a function of greater operational focus. They may also be related to better asset management and/or property selection.
For each property type, the REIT implied cap rate exceeded its respective NCREIF ODCE appraisal cap rate. Interestingly, the apartment appraisal cap rate was 33 basis points lower than the year-end U.S. 10-year Treasury yield and the NCREIF ODCE industrial cap rate was 95 basis points lower.
In the fourth quarter of 2024, the public-private cap rate spreads were 169, 141, 84, and 80 basis points for the industrial, apartment, office, and retail sectors, respectively. All else equal, these spreads suggest that REITs offer more attractive pricing relative to private real estate across each of the examined property types. Pricing in some sectors like industrial and apartments remains particularly compelling.
REITs provide investors access to well-located, high-quality, institutional-grade properties managed by best-in-class operators. Across the four traditional property types, U.S. public equity REITs have enjoyed occupancy rates akin to or higher than their private real estate counterparts. REITs have also continued to maintain a pricing advantage. The combination of these factors presents a compelling buying opportunity. Today, REITs continue to allow real estate investors to get more for less.