Edward F. Pierzak

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).

The commercial real estate (CRE) mortgage market has changed dramatically since the end of 2021. For many real estate investors, gone are the days of low-cost, readily available property financing.

With REIT implied capitalization (cap) rates significantly higher than private real estate transaction cap rates, the attractiveness of public equity REITs has increased.

The industrial, retail, and apartment property types have maintained occupancy and four-quarter rent growth rates akin to or higher than their respective pre-pandemic levels.

In the third quarter of 2022, the FTSE Nareit All Equity Index and NCREIF Fund Index–Open End Diversified Core Equity posted rolling four-quarter total returns of -16.3% and 22.1%, respectively.