T
hree years ago, when the Fed began tightening policy to tame inflation, a widening gap appeared between public and private real‑estate valuations. The implied cap rate derived from Nareit’s REIT Industry Tracker diverged sharply from the cap rates that private appraisers assign to their own properties. At its peak the spread reached 243 basis points, a figure that seems illogical given the similarity of the underlying assets. By Q2 2025 the gap had narrowed to 132 basis points, yet it remains unusually persistent.
Historically, such dislocations have surfaced in 2000, 2009 and 2018, but they typically closed within two years. In this cycle the spread has lingered for three years and counting. The root of the problem lies in the methodology: public cap rates are market‑derived, while private appraised rates are set by the funds themselves. Many analysts suspect the appraised rates are overly generous. One clue is that they hover almost level with 10‑year Treasury yields, leaving almost no risk premium for real‑estate exposure. A transaction‑based private cap rate, however, aligns more closely with the Nareit implied rate, suggesting the market is pricing private assets lower than the appraisals indicate.
If Treasury yields were to fall in line with a Fed rate cut, REIT valuations could rise and implied cap rates could shrink, narrowing the spread. The FTSE Nareit All‑Equity REITs Index rose 0.4 % in September, partly thanks to a 25‑basis‑point Fed cut. Nareit also released an analysis of 25 large, actively managed global real‑estate funds, complementing its domestic work.
**Interview highlights**
*Ed Pierzak* notes the current 130‑basis‑point gap between REIT implied and appraisal cap rates, with the appraisal rate peaking at 4.7 % in Q2 2024 and settling near 4.5 % today. He points out that the 10‑year Treasury rate is almost identical to the appraisal rate, an untenable position that would leave a buyer in a negative‑leverage situation if they had to finance at 6 % or more. Market‑derived implied and transaction cap rates are similar, giving a true sense of pricing. Private appraisers are waiting for a Treasury drop to justify their rates, which would benefit REITs as the spread narrows.
*John Worth* explains that institutional investors use REITs as a benchmark to gauge effective cap rates before moving into private real‑estate or secondaries. The current lack of forced sales—thanks to accommodative lenders—means there is little pressure to adjust valuations. During the Great Financial Crisis, urgency was higher, but not now.
*Nicole Furnari* discusses the global active‑tracker analysis. The largest funds are heavily weighted toward the Americas (74 % exposure) compared with 64 % for the FTSE/EPRA Nareit Global Extended Index. Asia‑Pacific and Euro regions have recently outperformed the U.S. index, prompting a re‑examination of allocations. Global funds are overweight residential but are pulling back, and they hold a significant portion of diversified REITs—a structure more popular in Asia than in the U.S. Over time, funds have shifted from traditional assets into data centers, healthcare, and self‑storage, while telecommunications remain underweight. Office exposure differs globally; in the U.S. it has flattened, whereas in Asia and Europe it has risen, reflecting varied return‑to‑office dynamics.
In sum, the public/private valuation gap remains larger and longer‑lasting than usual, driven by potentially inflated private appraisals and a market that has yet to fully adjust. Fed rate cuts and falling Treasury yields could help close the spread, benefiting REITs and aligning private valuations more closely with market reality.
