Three years ago—when the Fed began raising interest rates to help stem high inflation—a valuation gap emerged between public and private real estate as evidenced by the implied cap rate from Nareit’s quarterly REIT Industry Tracker and private appraisal cap rates.
At its peak, this spread between public and private real estate reached 243 basis points which, intuitively, makes little sense since the underlying assets are so similar. This gap has narrowed since the peak, but still stood at 132 basis points as of the second quarter of 2025.
While dislocations between public and private real estate historically are not uncommon—similar gaps emerged in 2000, 2009 and 2018—what’s unusual in this cycle is how long the gap has remained. Historically, the gaps have closed in about two years while in this cycle it’s three years and counting.
The key issue is that while the public cap rate is derived from market performance, the appraised cap rate on private real estate comes from funds themselves. There’s long been speculation that these appraised cap rates are too generous. As one piece of evidence, the appraised cap rates are very close to 10-year Treasury yields. There’s almost no spread to account for the risk inherent in real estate vs. the risk-free Treasury rate. In addition, a secondary measure of private real estate cap rates based on transactions is more similar to the Nareit implied cap rate than the appraised rate.
But there are signs that the tables may finally be ready to turn. If 10-year Treasury yields fall in line with the Fed cutting rates, that could provide a boost for REIT valuations and lower implied cap rates. If the appraisal rate holds steady, the spreads could narrow. (It would also allow for a more appropriate spread to emerge between the appraisal rate and 10-year yields.)
In other recent REIT news, the FTSE Nareit All Equity REITs Index rose 0.4% in September, in part boosted by the Fed lowering rates 25 basis points.
In addition, Nareit debuted an analysis of 25 large actively managed global real estate funds that complements similar work it has done on domestic actively managed funds.
WealthManagement.com spoke with Ed Pierzak, senior vice president of research, Nicole Furnari, vice president of research, and John Worth, executive vice president for research and investor outreach, about these trends and more.
This interview has been edited for length and style.
WealthManagement.com: We’ve talked about the public/private divergence in the past. Can you talk about the recent pieces you’ve written and where we stand with that?
Ed Pierzak: We still have this spread of 130 basis points between REIT implied and appraisal cap rates. Ultimately, that gives an advantage to REITs.
The appraisal cap rate hit a peak of 4.7% in the second quarter of 2024. Since that time, we have not been getting those modest upward movements. It effectively leveled out and then went slightly downward, so it’s 4.5% today.
If you look at the 10-year Treasury rate, it’s effectively hugging the appraisal cap rate. When you see this, you have to scratch your head. It’s an untenable position. There should be some premium over the 10-year rate. If you had to buy at 4.5% cap and went to get a loan, it would be 6% or more. You would be in a negative leverage situation.
The Nareit implied and NCREIF transaction cap rates are market-derived. The equities markets tell us where REIT implied cap rates sit, and the transaction cap rate is from willing buyers and sellers. And those two cap rates have been very similar. That provides a true sense of market pricing today.
It almost feels like we’ve hit an impasse. We’re playing a waiting game, and private appraisers are waiting and hoping they will see the 10-year drop enough to make the appraisal cap rate look right. But we still think it benefits REITs as this closes. It’s something we’ll have to watch.
WM: In our past conversations, you’ve discussed how these gaps are not unusual, but that they usually do resolve. Is there any precedent for a gap persisting this long?
EP: Normally, these divergences correct as quickly as four quarters. This has been dragging on for a while. In looking for reasons or rationale behind it, some of it stems from pricing and the big question here for the portfolio managers is there an impetus for them to sell?
Oftentimes, that pressure comes from loans coming due, but what we have found is that lenders have been accommodative. As long as borrowers are making payments, lenders may recognize that the valuations are not ideal, but people haven’t been forced to go the market. As long as that continues, there’s not a lot of pressure to adjust.
WM: Does it say anything about the state of the market that we don’t have many forced sales occurring?
EP: A lot of times loans were at lower rates and reset to higher rates. My guess is a lot of owners are saying, “We’re happy to pay a higher rate, but don’t adjust the loan valuation.” If you were to adjust the cap rate accordingly, the owner would get a smaller loan.
During the Great Financial Crisis, there was a greater sense of urgency in the market overall to make adjustments, whereas we haven’t had that same sense of urgency in this cycle.
John Worth: Large institutional investors understand what’s happening in this valuation diversion. Specifically, some have been asking me, “Can I see effective cap rates out of REITs?” because they can then go out into private real estate or secondaries, and they want to make sure they are getting assets at a true market value. So, they are using REITs as a comparator. And they can also see that the entry point for REITs is much better than the entry point for private real estate.
WM: We are also now at a point where the Fed is moving rates. We got a 25 basis point cut, with expectations for further cuts. How will that affect things?
EP: It helps with the convergence. Right now, the 10-year is at 4.1%. With respect to the next Fed move, my guess is that’s already priced in. If you look at the CME Fed Watch, the odds for a 25 basis point are at 99%. The only surprise would be if it’s larger.
Ultimately, what we’ve found is that we’ve had this inverse relationship of REITs and interest rates. A drop in interest rates should send REIT valuations up and the implied REIT cap rate down. In this type of scenario, we could see outperformance.
WM: Let’s talk about the global active tracker analysis you’ve rolled out. What are the high-level takeaways?
Nicole Furnari: It has always been the intent that we would do the same for global real estate as we have for U.S.-focused funds. The first couple of pieces we have published are an overview of the data based on what active managers have been doing over the past five years, and we will do quarterly updates.
We found that the largest actively-managed global real estate funds are overweight to the Americas with 74% exposure to the region vs. 64% for the FTSE/EPRA Nareit Global Extended Index. There has been an edging off of Asia/Pacific over time. But recently, for the first time in a while, the Asia/Pacific and Euro regions have outperformed the U.S. index. So, we will look to see how these allocations shift.
My property type, global funds—like U.S. ones—are overweight in residential, but they have been pulling back over time. What’s different for global funds is that they are heavily invested in diversified REITs. That REIT structure is more popular in Asia than in the U.S., so we would expect to see that.
Over time, there’s also been a shift out of the more traditional asset classes into data centers, healthcare, and, although it’s a tiny weight in the funds, a strong move to self-storage as well. We also see that telecommunications are quite underweight. We saw this in the U.S. as well. In the U.S., it has gotten overweight, so we may see that in the global tracker eventually.
WM: I also noticed the office allocation seems different than the U.S., but my understanding is return-to-office happened earlier outside the U.S., and so that’s given the sector a different trajectory. Is that accurate?
NF: It’s interesting. Funds were overweight looking back to 2020 and a little underweight in 2025. But in the U.S., you saw a huge withdrawal, and then in the most recent analysis, it was back to parity.
JW: You have seen different return-to-office patterns across the world. In the U.S., office is flat to slightly down in 2025. In Asia, in dollars, office is up 33% and in Europe it’s up 12.5%. There are different dynamics.
