Edward F. Pierzak

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.

The U.S. economy has been marked by mixed economic growth results, elevated inflation, and higher interest rates.

The U.S. commercial real estate market is amid an uncoupling. Property operational performance has generally been strong for both public and private real estate, but valuation metrics and total returns have diverged.

With mixed economic growth results, waning job gains, increasing interest rates, and rising recession risk, the U.S. economy is facing numerous headwinds.

After experiencing two consecutive quarters of negative growth in the first half of 2022, U.S. real GDP grew by 2.6% in the third quarter this year.