Public and private investments in anything, including commercial real estate, have significant differences. The main one is serial correlation in private markets, which is largely missing in public ones. Not accounting for that difference can result in masked risk in private CRE equity. That can result in overallocation to CRE equity, according to CBRE.

Public markets tend to be relatively transparent and liquid. There is constant available activity that makes them efficient at distributing news. As a result, “prices fluctuate as if they are random,” although they aren’t. That is an illusion. Public markets are forward-looking and there is causality.

Private markets, on the other hand, don’t have constant public updates. They are “illiquid and transaction costs are higher.” Instead, they look at methods like appraisals and transaction histories which create lagged reactions and, as a result, serial correlation. It essentially becomes a smoothing function that lets past returns partly predict future returns.