D
espite recent interest rate-driven volatility, public REIT returns have surged by over 16% year-to-date, driven by strong performances from healthcare, data center, and office REITs. According to JLL's latest M&A and Strategic Transactions Monitor, these sectors are now trading at a premium to net asset value (NAV), indicating a favorable cost of capital.

    As a result of the attractive valuations, REITs are bolstering their capital reserves in preparation for acquisitions, with forecasts pointing to a busy 2025. Valuation declines have also appeared to bottom out for both public and private real estate, while nominal cap rate expansion has plateaued, providing an entry point for sidelined capital.

    Redemption queues for open-ended commercial property funds have begun to decrease after peaking at 19% of NAV in the previous quarter. The widening valuation gap between top- and bottom-performing REITs presents pricing arbitrage opportunities, potentially catalyzing increased M&A activity next year.

    With interest rates trending downward, debt markets are poised to remain active for 2025. Office REITs have emerged as top performers in 2024, benefiting from strong fundamentals despite negative sector headlines.

    "Coming out of the GFC, we witnessed a V-shape recovery. That same pattern is emerging in both public and private capital markets today," said Steve Hentschel, Senior Managing Director at JLL. "The capital markets signals point to attractive entry points, with growth tailwinds and increased transaction activity persisting."

    Similar trends are occurring in private capital markets, where asset valuations have stabilized, yields are compressing, and institutional capital is becoming increasingly active. This is happening in tandem with slowing construction starts, which will put pressure on future supply.

    JLL's report also highlights the living sector, which has expanded to include subsectors such as affordable housing, student accommodations, seniors' facilities, manufactured housing communities, and single-family rentals. The low correlation among these subsectors enables investors to diversify their exposure and mitigate risk while boosting the attractiveness of the sector.

    As we head into 2025, increased activity is expected across the commercial real estate space, driven by REIT market trends. "There are a lot of breadcrumbs on display for a very active 2025 across both public and private real estate capital markets," said Sher Hafeez, Senior Managing Director at JLL.

    Barring any unforeseen events, 2025 should continue to move towards normalization, with JLL's Capital Markets group poised to provide full-service global capital solutions for real estate investors and occupiers.