As highlighted in a recent Nareit commentary, the current lingering public-private real estate valuation divergence has been an unwanted visitor for commercial real estate (CRE). While REIT valuations have meaningfully reacted to financial market movements, private real estate appraisers and portfolio managers have been slow to incorporate higher interest rates into valuations and have embarked on a strategy of hope that the market will come to them in the form of lower rates as the Federal Reserve eases short-term rates.
Although some private real estate participants may find comfort in this tactic, it has impeded the price discovery process and stalled the property transaction market. Interestingly, it has also increased the appeal of U.S. public equity REITs, as they have offered investors access to high-quality, well-located properties at discount prices relative to the private market. Furthermore, as public and private property values become more in sync with one another, REITs will likely continue to have the upper hand when it comes to investment performance and acquisitions.
Data from Nareit’s REIT Industry Tracker and the National Council of Real Estate Investment Fiduciaries (NCREIF) shine a light on the state of the public-private property valuation adjustment process. The chart above displays public (REIT implied) and private (transaction and appraisal) real estate cap rates, as well as average U.S. 10-year Treasury yields, from the fourth quarter of 2021 to the second quarter of 2025. The NCREIF transaction and appraisal cap rates solely focused on properties from open end diversified core equity (ODCE) funds.
In the current valuation divergence, the public-private cap rate spread reached its peak at 243 basis points in the third quarter of 2022. This gap has been stubbornly slow to close. After nearly three years, the cap rate spread has remained wide; it stood at 132 basis points as of the second quarter of 2025.
Traditionally, both public and private real estate markets have adjusted toward a pricing equilibrium during a CRE valuation divergence. At this time, however, it appears that the valuation adjustment process may have hit an impasse. While REIT valuations have meaningfully reacted to financial markets, appraised private real estate values have not.
The NCREIF ODCE appraisal cap rate peaked at 4.71% in the second quarter of 2024. Despite an elevated interest rate environment, it has followed a modest downward trend since that time, reaching 4.54% by the second quarter of 2025. During that time, the spread between the appraisal cap rate and the quarterly 10-year Treasury yield averaged only 32 basis points. This relationship is untenable, but it persists due to private real estate appraisers’ and portfolio managers’ inaction.
Interestingly, the Nareit REIT implied and NCREIF ODCE transaction cap rates have essentially been in sync with one another since the crest in the appraisal cap rate. Over the last five quarters, the REIT implied and private transaction cap rates averaged 5.73% and 5.62%, respectively, a gap of a mere 11 basis points.
The slow pace of change in appraised values limits volatility, but comes with substantial costs. It impedes the market’s price discovery process, limits transaction market liquidity, and obliges investors to pay artificially high investment management fees as most fees are based on some measure of assets under management. Artificially inflated fees should prove to be problematic for plan boards, staff, and participants.
With the additional Fed easing, long-term interest rates may decline, making current appraisal cap rates more tenable. This decline in interest rates, however, will also likely benefit REITs. A drop in the REIT implied cap rate is expected to bolster REIT total returns. In addition, as public-private property valuations become more aligned with one another, REITs will likely possess first-mover advantages when it comes to acquisitions due to their operational strength, well-managed balance sheets, and efficient access to a variety of public and private capital sources.