Private CRE is in denial. Public REITs already marked the bottom.
Private open-end funds are still pretending prime assets trade at 5.25% cap rates based on stale appraisals. Meanwhile, liquid public REITs marked the market 18 months ago, trading at 6.75%+ implied caps and 20% discounts to NAV.
With public debt locked at fixed 3.8% coupons for 6+ years, public balance sheets aren’t the ones facing forced refis. Watch who ends up buying private syndicator distress at 30% below replacement cost.
Public REITs have indeed been quicker to adjust to market realities compared to private CRE. Public REITs, with their transparency and liquidity, marked the bottom 18 months ago, reflecting implied cap rates of 6.75%+ and trading at significant discounts to NAV. This contrasts sharply with private open-end funds, which are still anchored to outdated appraisals, holding onto the notion that prime assets trade at 5.25% cap rates.
The divergence is further highlighted by the stability of public REITs' balance sheets, with fixed debt locked at favorable 3.8% coupons for over six years. This positions public REITs to avoid the immediate refinancing pressures that private syndicators may face. As private CRE grapples with distress, particularly from syndicators, opportunities are likely to arise for public REITs or other well-capitalized players to acquire assets at steep discounts—potentially 30% below replacement cost. This dynamic underscores the importance of liquidity, transparency, and proactive market adjustments in navigating the current CRE landscape.
Sources: I'm long office properties, What's the catch in CRE?, Career Path in Commercial Real Estate, What's the catch in CRE?, Real Estate Trends (All Asset Types)
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