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Listed REITs and Private Property Investments

Debates erupted over the years whether listed real estate investment trusts (REITs) are a substitute for commercial property in a diversified portfolio. Institutional investors often include publicly traded REITs and privately held properties in their real estate allocation.

Yet academic research suggests that though the private and public markets both exclusively own and operate commercial real estate, they often adjust differently in response to overall economic conditions. A research paper co-authored by University of Florida Real Estate Professor David Ling[1] finds evidence that the performance of privately held property predicts the performance of public REITs. This raises the question: Is an investment in listed REIT shares the same as an investment in physical property?

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Many institutional investors add REIT shares as a substitute for direct investment in commercial property. But there are significant differences, with perhaps the most notable being that shares of listed REITs are easy to buy and sell — and this benefit seems reflected in values. Research on the net asset values (NAVs) of REITs suggests they enjoy a premium of roughly 2% to 3% due to the liquidity a public market listing provides shareholders, said Dirk Aulabaugh, who heads global advisory services for Green Street, a commercial property research firm. “It’s important to note that REITs are not always trading at premiums to private values,” said Aulabaugh, who is a member of the advisory board of Bergstrom Real Estate Center. “But over time that seems to be the appropriate premium.”

To explore the differences and similarities of the two markets, we examined the investment returns and trading volumes of U.S. REITs and privately held properties during periods of economic expansion and recessions. For our analysis we used 20 years of indexed data from National Council of Real Estate Investment Fiduciaries (NCREIF) as a proxy for returns in the direct commercial real estate market. Returns on publicly traded equity REITs were obtained from the Center for Research in Security Prices (CRSP) and MSCI – Real Capital Analytics. We removed property types other than apartment, industrial, office and retail because the NCREIF Index does not track the performance of other property types.

Our analysis shows that the two markets performed similarly when the economy expanded, such as between 2005 to 2007 and 2011 to 2019 (Figure 1). Not unexpectedly, the public REIT returns exhibit more variability because shares are far more liquid than private assets. Also, publicly traded REITs are typically leveraged where as properties in the NCREIF Index are not leveraged.

Source: National Council of Real Estate Investment Fiduciaries (NCREIF) and the Center for Research in Security Prices (CRSP)

The performance of the two markets was dramatically different during the Great Recession starting in late 2007 and the COVID-19 recession in 2020. Public REIT stock prices and returns dropped sooner and much more dramatically than private property valuations and returns. Although there are many differing characteristics between the two markets that might cause this result, we assume they all relate to difference in ownership form. There is also no claim that one index behaves more accurately than the other. The objective is to simply identify the distinctly different response of public and private performance to economic shocks.

Looking at transaction volumes, the difference was far more dynamic — and went in the opposite directions (Figure 2). During periods of economic growth, the volume patterns increased at a similar rate. However, during the economic shock periods, listed REIT volume tended to remain constant and private property transactions plummeted. This variance in response was likely due to the difference in liquidity between the two markets.

Source: MSCI – Real Capital Analytics and the Center for Research in Security Prices (CRSP)

In contrast to public REITs, private equity transaction volume decreased during uncertain times, undoubtedly because buyers recognized a widening bid-ask spread. Sellers of private assets are reluctant to react swiftly during sudden economic downturns given the high costs of private market transactions. Once the uncertainty was resolved, however, the public and private markets returned to similar return and volume patterns.

Property sector analysis

Analyzing the performance of different property types revealed that the pricing and volume patterns were more a function of the conditions of the broad market rather than specific sectors. In other words, each of the public sectors followed a similar pattern but differed from the private market, and vice versa.

Again, the shock of recessions sent the two markets on diverging paths and both markets came together after the financial shock and continued similar paths (Figure 3). During the recessions, listed REITs took a sharp downturn as each sector notched double-digit losses for consecutive quarters. In contrast, the volatility was not mirrored in the private market as returns started to decline a few quarters later and at a more gradual pace. The value of buildings in the private market is based on appraisals conducted by independent professionals and values take time to update, causing a lag in the response to market events.

Source: National Council of Real Estate Investment Fiduciaries (NCREIF) and the Center for Research in Security Prices (CRSP)

When it comes to trading volume, once again the changes were strikingly similar among all REIT sectors and among all private property sectors yet very different between the two markets (Figure 4). As the market entered a recession, volume across all sectors fell in the private market while all REIT sector volume remained high. This indicates all sectors responded consistently during recessionary shocks. However, responses were highly dependent on the market in which real estate trades – public or private. By their nature of being traded on a public stock market, REIT securities encourage continued trading during a shock, even as prices change rapidly, regardless of the sector. The bulky illiquid nature of commercial assets discourages rapid sales during a shock, making price discovery difficult. Again, this is a property market phenomenon consistent across all property types.

Source: MSCI – Real Capital Analytics and the Center for Research in Security Prices (CRSP)

Listed REITs could be viewed as property businesses bought and sold on a stock exchange and the private market deals with the illiquidity of large physical assets. This difference causes the two markets to have a diverse reaction to times of financial stress. Listed REIT returns are volatile while transaction volume is steady, but private property returns are steady while transaction volume is volatile. The disparate trading behavior leads to vastly different responses to economic shocks — and likely explains the significant gap in returns and values.

Distinct investments

So, what is the answer to our original question of whether investing in listed REITs is the same as investing in direct properties? The answer is “Yes and No.” An investment in REITs is similar to an investment in direct property until the two are dramatically different. Although they hold similar assets, listed REITs and direct private property investments operate in different markets. During normal financial times, the value of the underlying assets will dominate performance making public and private results very similar. But during times of economic shock, the differences in ownership structure, market operations and business components cause the investment forms to deviate from each other.

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For investors, diversifying a portfolio across both markets may be the best way to hedge against a financial shock. In the listed REIT market, you will have the benefit of liquidity but will face significant return volatility. In the private market, returns will be directly tied to the assets but selling during a financial shock may be complicated. It is in the best interest of investors to understand the risks and invest in the specific market that meets their needs for the present and long term.

Income and Pricing

In the real estate business, fundamental variables like income and pricing determine investment returns — no matter the form of ownership. Returns are a function of income and pricing. Vacancy rates are a product of the supply and demand of rental space, and this directly impacts the rent an owner can charge. The combination of rent and occupancy, minus expenses, determines income. Capitalization rates are a key indicator of current pricing. Thus, a change in either component affects investor returns.

The accompanying charts of vacancy and cap rates show these basic performance metrics plunged during the recent recessions. These fundamentals don’t care how a property is owned, as all assets compete in an open market. The charts also show that the changes in performance were market wide, not sector specific.

Source: MSCI – Real Capital Analytics

During the financial crisis of 2008 and 2009, all sectors suffered spikes in vacancy and cap rates. The operational component, vacancy, takes some time to unfold due to the long-term nature of commercial leases. Yet each sector responded similarly to the dramatic shift in economic conditions. The simultaneous decline in income and rise in cap rates pushed property values down sharply across all sectors, no matter if properties were owned by the public or private market. The timing and path of recognition of the change is what varied between the two markets.

Source: CBRE Econometric Advisors

During the recession in 2022, the fundamental response was a little different. The office sector was an outlier as office buildings suffered a sharp increase in vacancy rates tied to the economic shutdown associated with the COVID-19 pandemic. Otherwise, the relationship between public and private markets continued. This suggests ownership form, at least in the short run, affected the value and volume separately from the value impact of income and pricing.


  1. Ling, DC, Wang, C, Zhou, T. Asset productivity, local information diffusion, and commercial real estate returns. Real Estate Economics, 2022; 50: 89–121. Back to content

Sean O'Keeffe

Sean O’Keeffe is a UF Nathan S. Collier Master of Science in Real Estate candidate.