• *Compares transaction volumes for the previous 4 quarters relative to transaction volumes for the 4 quarters ended Q3 2019, just before the effects of the Covid-19 pandemic initially impacted markets.
  
• Sources: Green Street & Costar®, compiled and indexed by Partner Valuation Advisors

By Q3 2023, transaction volumes had fallen to 70% of pre-Covid levels before falling even further by Q3 2024 to 57% of pre-Covid levels. The industrial sector has held up the strongest, still exhibiting volumes materially inline (101%) with pre-Covid levels. The Residential (63%) and Retail (81%) sectors materially lag their pre-Covid transaction levels nationally. Both, however, have strongly outperformed the Office sector which has seen transaction levels fall to only 32% of pre-Covid levels as the market continues to grapple with price discovery in the relatively volatile post-Covid office tenant demand environment.

A lack of transaction activity is indicative of a wide gap in the bid-ask spread between buyers and sellers. As valuation professionals, we often look to the institutional public and private investment markets to monitor the width of this gap. The public REIT markets usually represent the ‘bid’ side of the spread, as these markets are largely pricing portfolios of real estate as if those assets were being bought at prices reflective of the fundamentals – including cap rates – of the current market environment. Conversely, the private REIT markets take a view more reflective of the relatively illiquid nature of commercial real estate assets and price their portfolios for the intrinsic value expected to be delivered over a longer-term investment horizon, usually 5- to 10-year hold periods. Therefore, private REIT valuations generally reflect where they would be willing to sell without a compulsion to do so in the immediate future.

As the Federal Reserve started raising interest rates in Q1 2022, the public REIT market prices reacted strongly while the private REIT market valuations remained relatively unchanged for several quarters. As such, after 6 months of price discovery, a material gap of more than 200 basis points had widened between the implied cap rates on the NAREIT index funds when compared to the same metric for the Open Diversified Core Equity (ODCE) valuations.

• Sources: NAREIT T-tracker & NCREIF

Interestingly, this material bid-ask spread gap didn’t initially exist in the industrial property sector, however, was observed across all other major property sectors. Since this initial measurement period, the public-private bid-ask spread premium has widened in the industrial sector, with public REIT’s valuing the sector more bullishly than the private markets (i.e. the implied cap rates are lower for public industrial REITS’s). All other property sectors have seen this public-private gap tighten over this period, with the more typical relationship of the public markets being more bearish in their current valuations (bid) when compared to their private market brethren (ask).

With some typical variation between sectors and markets, this overall tightening of the bid-ask spread is a good indication that we will see transaction volumes increase in 2025. The rebound will likely not be as dramatic as the one the market enjoyed from 2020-2021 but will instead be tempered by interest rates which are expected to remain fairly high. Given the extremes of the market since 2020, a gentle rebound is a welcome change, and we look forward to seeing more deals in 2025.