Edward F. Pierzak

Although many institutional investors focus their property investment strategies on private equity real estate, current and expected market conditions tend to favor public real estate.

During this period of divergent public and private property valuations, the commercial real estate mortgage market has been marked by higher interest rates and stricter underwriting standards.

A recent Nareit market commentary highlighted that the “ostrich effect,” an investor behavior where risky situations are avoided by pretending that they do not exist, may aptly describe the attitudes of many private institutional real estate investment managers and appraisers when it comes to their valuation practices.

Norges Bank Investment Management (NBIM) recently published a discussion note, “Drivers of Listed and Unlisted Real Estate Returns,” which analyzes the drivers of U.S. public and private real estate returns and evaluates real estate exposures in the context of a diversified investment portfolio.

A common myth tells us that ostriches bury their heads in the sand when faced with danger. While not true, the phrase “burying your head in the sand” has become a popular idiom to describe an individual who ignores the existence of a problem with the hope that it will just go away.

The rapid rise in interest rates since the beginning of 2022 has exposed fault lines in banking, private equity, and commercial real estate business models that were predicated on low debt rates.

In making the case for an allocation to real estate in an investment portfolio, one of the oft-cited arguments is real estate’s ability to generate income.

Differences in cap rates capture the divergence that occurred between U.S. public and private real estate markets in 2022, with public real estate cap rates (REIT implied) higher than their private real estate counterparts (transaction and appraisal).