The Gap Between Public and Private Real Estate Widens on Office Fears. Did Investors Over-React?

“A lot of the negative sentiment on real estate focuses on the office sector, but it only accounts for about 3 percent of the REIT market,” says CenterSquare’s Uma Moriarity.


Illustration by II

Investors in publicly traded real estate companies may have over-reacted to the macro headwinds and negative headlines about remote workers killing the office.

The potential trend can be seen in the huge gap between the price of publicly traded properties and their privately held peers.

The capitalization rate, which measures the potential rate of return for properties based on their market value, rose from 4.9 percent to 6 percent for real estate investment trusts (REITs) in the second quarter year-over-year, according to real estate investment firm CenterSquare. The cap rate for REITs was at the highest level in three years. For private real estate investments, the cap rate rose from 4.9 percent to 5.5 percent during the same period.

“We’ve been following this gap between the public and private markets for a while,” said Uma Moriarity, senior investment strategist and global ESG lead at CenterSquare. “It started last year, when the REIT market started to price in the impact of rising interest rates on real estate valuations, whereas the private market tends to be a little bit slower in terms of pricing in those types of changes.”


But now, with the cap rate for REITs 50 basis points, or .5 percent, higher than that for private real estate investments, Moriarity said she believes that the REIT market has clearly “overreacted” to the macroeconomic headwinds. The last time the difference between the cap rates for REITs compared to private real estate investments was over 50 basis points was in the first quarter of 2021.

“The private market cap rates…are effectively our projections and where we think real estate valuations should be,” Moriarity said. “Today is a really interesting opportunity for a real estate investor to put incremental capital into the REIT market, because you are able to get access to the same types of investments, but at a discount.”

Moriarity believes the anticipated pain from the commercial real estate sector is overdone. “A lot of the negative sentiment on real estate focuses on the office sector, but it only accounts for about 3 percent of the REIT market,” she said. The office sector has “The other 97 percent includes a lot of other areas of the commercial real estate that are currently doing really well fundamentally.”

Moriarity is particularly bullish on data centers, which she believes will flourish amid the rise of artificial intelligence. Top technology companies, such as Amazon, Microsoft, and Google’s parent company, Alphabet, are all investing in cloud computing to facilitate AI deployment. “There are two companies that have scaled platforms with the capacity to create great solutions, and both of these companies are REITs,” she said. Those two data center REITs are Equinix and Digital Realty Trust, which account for 8.6 percent the U.S. REIT market, according to data from CenterSquare.

Moriarity is also optimistic about real estate investments in the healthcare sector, including senior housing and life science labs.

Moriarity added that investors in REITs should avoid the office sector and areas that are tied to consumers, including hotels and retail malls. “I think some of the areas that tend to be more economically sensitive will be areas that you would be more cautious about during an economic downturn,” she said.