The gap between public and private real estate valuations is narrowing, signaling that investors are gearing up for increased transaction activity in 2025. Both sectors are moving toward alignment as public real estate investment trusts (REITs) post stronger returns, according to a new report from Nareit’s senior vice president of research, Edward Pierzak. Pierzak suggests that the ongoing convergence in valuations will make it easier to negotiate deals and boost market liquidity next year.

At the heart of the slowdown in transaction activity is the “cap rate spread,” which measures the difference between REIT-implied capitalization rates and private real estate appraisal cap rates. When the spread is wide, it indicates that public and private investors are valuing properties differently, making financing more difficult. Disparate valuations force investors to either delay deals or risk overpaying for properties, which has slowed deal flow since 2022, as private market sellers remain hesitant to lower their prices.