Nareit researchers flag a 127-basis-point cap rate gap between private real estate and REITs

The gap between the cap rates private real estate appraisers assign and the cap rates implied by listed REIT prices has been open since late 2021, measuring 127 basis points as of the second quarter in figures Ed Pierzak, Nareit's senior vice president of research, discussed with WealthManagement.com in an Oct. 5 Q&A. For advisors, the figure is arithmetic rather than trivia: appraisal cap rates have sat essentially still for several years while the risk-free rate they are implicitly measured against has climbed past them.

Pierzak and John Worth, Nareit's executive vice president for research and investor outreach, worked through the divergence for the outlet, noting that dislocations between appraised private values and public market pricing do occur periodically and historically have corrected quickly—but this one has run longer than any episode the conversation accounts for. The persistence comes mostly from the private side, where appraised cap rates held steady even as the 10-year Treasury rose, a steadiness the article describes as at times seeming illogical. Second-quarter appraised cap rates came in right around the 10-year's yield, and a runup since then has left 10-year Treasuries around 5.3%, which the piece says is the highest level in about two decades, leaving private real estate priced below the risk-free rate in what the interview calls a negative risk premium.

Pierzak said the appraisal rate is hugging the 10-year and called the relationship untenable, adding that there are a lot of reasons to say the spread does not make sense. The plain gloss is not complicated: an appraised cap rate at or below the yield on a 10-year government bond means the income a property produces is at best level with a risk-free alternative carrying no leasing risk, no capital spending and no lockup—and on the interview's account, that comparison has been allowed to stand for years.

The listed side has already moved. REITs have sold off since a July peak, a decline that will feed the next calculation of implied REIT cap rates, while private funds had not announced third-quarter adjustments when the article was published and, in Pierzak's telling, how they will proceed is still to be seen.

For investors weighing real estate allocations, the article frames the gap as a potential opportunity: listed REITs are trading at a higher cap rate than comparable private property is appraised at, so a client buying public real estate pays less for a given stream of rent. The mirror reading, and the one the interview's description of the private marks tends to support, is that the appraisal number is out of position and the public-market discount is information about where private values are heading rather than a bargain. Either way, an advisor has to know which of the two prices the client's real estate exposure is actually marked at.

Because a cap rate is a property's income divided by its price, a 127-basis-point gap is a difference in what two sets of buyers pay for the same dollar of rent, not a rounding difference in valuation, and that distinction reaches client statements in two ways. A client holding listed real estate has already taken the July-to-now selloff; a client holding private real estate through a fund has not, unless the fund's third-quarter appraisal decides otherwise, and a correction that arrives through the appraisal side would reach that client as a change in the value the fund reports—the version of the move an advisor would have to explain after it happened.

Pierzak raised one open-ended fund's handling of investor redemption questions as the instructive example: the fund provides some liquidity, but a market dislocation can build a redemption queue, at which point the fund must decide how to resolve it—if every asset were marked to market, it could sell assets and pay investors who want out. This fund got creative instead, and the published excerpt, which the outlet notes was edited for clarity and length, does not lay out the terms it chose. A queue is a claim that has to be met at whatever price the fund assigns to its assets, and that is where the tension sits.

The five-year life of the gap is what should change behavior, because a spread that closes within a quarter is a trading opportunity, while one that has outlasted every correction the interview's history allows for is a valuation question an advisor has to answer for clients holding both versions of the same asset class, one repriced every day by the market and one repriced by appraisal. The article's own read is that the gap remains a potential opportunity to capitalize on; the record it describes is that appraisals have not moved to prove it. Two prints will show whether that holds: the next implied REIT cap rate calculation will carry the selloff in listed values since July, and the third-quarter appraisals, unannounced when the Q&A ran, will show whether the private side finally moved. Until they arrive, the distance between the two stands at the 127 basis points Nareit last measured, with the appraisal side of the ledger where it has been since 2021.