Public vs. Private Commercial Real Estate Investing: Similar Genes

Within the broad topic of “how to invest in commercial real estate?”, there is a hotly debated topic on the merits between public (listed) real estate and direct private market investing. The debate over whether REITs truly represent real estate is still ongoing, despite decades of academic and practical evidence confirming REITs as excellent real estate proxies. Many institutional investors still favor private market vehicles, citing short-term volatility as their main objection to REITs. But is this skepticism justified?

The core argument against REITs is their daily price volatility, which appears much higher than the appraisal-based returns of private real estate funds. However, this gap is largely an illusion created by the infrequent and lagged nature of appraisals. When private market returns are “de-smoothed” to correct for reporting lags, REITs and direct commercial real estate investments show remarkably similar risk profiles and high correlations. Over longer time horizons, REIT returns closely track those of private real estate, making them siblings in the commercial real estate investing universe.

Ignoring REITs can mean missing out on superior returns. Over the past three, five, and ten years, the All Equity REIT Index has consistently outperformed the ODCE Index (a benchmark for core private real estate funds), especially when accounting for net-of-fee returns. This outperformance is partly due to REITs’ greater exposure to non-traditional sectors and their lower fee structure. According to a 2024 CEM Benchmarking study, REITs have outpaced private real estate by approximately 150 basis points per year, with half of that advantage coming from lower fees.  

One of the most compelling reasons to include REITs in a real estate allocation is the opportunity to arbitrage pricing differences between public and private markets. When REITs trade at significant discounts to private market values, savvy commercial real estate investors can capitalize on these discrepancies for superior returns. Conversely, buying private vehicles when REITs are trading at premiums can also be effective. This strategy is especially relevant today in sectors like apartments and single-family rentals, where REITs currently trade well below private market pricing.

Excluding REITs from real estate benchmarks can leave investors disconnected from real-time market movements. REITs have historically led private market pricing across multiple property cycles, providing timely signals that private benchmarks often miss by a year or more. Including REITs ensures that performance measures reflect current market realities, not outdated appraisals. 

REITs offer commercial real estate investors unmatched flexibility and liquidity compared to private funds. The ability to rebalance portfolios quickly and efficiently is a major advantage, especially in volatile markets. Despite these opportunities, U.S. pension allocations to REITs have remained stagnant at around 0.6% for 25 years, while private commercial real estate investing has grown. This trend is likely to continue as private funds become more prevalent in 401(k) lineups, even though REITs offer a cheaper and more efficient alternative.  

For investors seeking competitive long-term returns, lower fees, and real-time market insights, REITs are an essential component of any commercial real estate investing strategy. Embracing REITs alongside private market investments unlocks flexibility, liquidity, and opportunities for outperformance – making them a smart choice for fund raising and portfolio diversification.

And above all, having the right data to back your movements across both public and private markets can make all the difference.