Assessing Public vs. Private Real Estate Dynamics

Public vs. Private Real Estate

While real estate is often treated as a single asset class, investors access it through two distinct markets: public real estate, primarily via publicly traded Real Estate Investment Trusts (REITs), and private real estate, through direct ownership or private funds. Both convey an ownership interest in the underlying properties, but they differ in pricing mechanism, liquidity, and valuation practice. REITs trade continuously, so valuations adjust in real time to economic data, rate expectations, and earnings. Private real estate relies on periodic appraisals and infrequent transactions. As a result, public markets often lead private markets both into and out of dislocations.

Current Market Dynamics

The cleanest way to see this is through capitalization (cap) rates, which represent the unlevered yield on a property, calculated as net operating income (NOI) divided by value. Cap rates move inversely to price: a higher cap rate implies a lower valuation. Historically, the spread between REIT implied cap rates and private appraisal cap rates has been modestly positive. Today's gap sits well outside the normal range. As of the first quarter of 2026, the REIT implied cap rate was 5.89% versus an NCREIF ODCE¹ private appraisal cap rate of 4.44%, a spread of 145 basis points, and the 17th consecutive quarter of divergence. Since the fourth quarter of 2021, the 10-year Treasury yield has risen 267 basis points, while REIT implied cap rates responded, increasing 144 basis points from 4.45% to 5.89%. Private appraisal cap rates moved just 58 basis points, to 4.44%, essentially the level at which public REITs were priced at the end of 2021. While cap rates between the two markets are not expected to match due to reporting lags, differences in sector composition, and liquidity characteristics, they would typically be expected to move in the same direction, particularly following a meaningful increase in the 10-year Treasury yield.

One reason these gaps can persist is that public and private investors process information differently. REIT investors continuously incorporate changes in interest rates, financing conditions, leasing trends, and economic expectations into security prices. Private market participants, by contrast, often focus on long-term property cash flows and rely on appraisal-based valuation methodologies that update less frequently. During periods of rapid market change, this can make public real estate appear excessively pessimistic or optimistic relative to private valuations. Historically, however, public pricing has often served as an early indicator of the direction private market values ultimately take as transactions and appraisals gradually reflect evolving market conditions.

LPL Research Takeaway

If spreads narrow toward longer-term levels, convergence is likely to occur through a combination of REIT price appreciation, increasing private-market cap rates, and improving transaction activity. Under most convergence scenarios, public REITs appear better positioned on a risk-adjusted basis given their liquidity, transparency, and current valuations. Private real estate is by no means expected to face widespread declines, rather expectations are for private market cap rates to adjust upward, especially as the 10-year Treasury yield has moved materially higher. Also, while the lagged private valuations remain rich for assets with strong NOI growth, in higher-demand sectors, these valuations can be supported as investors are willing to accept a lower current yield in exchange for higher future cash-flow growth. For investors, a tighter level in cap rates would likely coincide with greater price transparency and transaction volume, ideally helping create a stronger base level to build off. Overall, we believe real estate may have a place in diversified portfolios as part of a broader real assets sleeve, with a preference for sectors supported by long-term structural demand.

¹ NCREIF ODCE (officially the NCREIF Fund Index – Open-End Diversified Core Equity, or NFI-ODCE) is a benchmark that measures the investment performance of open-end, core real estate funds that primarily own diversified, stabilized U.S. commercial properties. It is a capitalization-weighted, time-weighted index reported gross of fees and is widely used by institutional investors to track the performance of core private real estate.