Richard Hill, Head of Real Estate Strategy and Research for Cohen & Steers, joined Keith Black, Managing Director of RIA Channel, to discuss public and private real estate markets.
Hill is often asked whether investors should allocate to private real estate or publicly listed REITs. Rather than choosing one over the other, it is important to understand that the two investments do not move closely together. In fact, listed REITs are a leading indicator for the returns on private real estate, with REIT returns falling before private real estate starts to decline, while REITs recover more quickly than private markets. There are times when private real estate returns are stable while REIT prices are declining, and other times, such as 2023, where REITs have positive returns while private valuations continue to decline.
Due to these different cycles, Hill notes that holding both REITs and private real estate in the same portfolio can be beneficial, as the return profile is smoothed out and drawdowns can be reduced. Depending on the point in the cycle, it may make sense to be overweight private real estate relative to REITs, while at other times it may be beneficial to be overweight in REITs. Hill suggests that now might be a good time to be overweight REITs relative to private real estate. REITs formed a bottom and turned positive late in 2023, while private real estate has already declined by 15%, potentially on the way to a 30% drawdown.
Commercial real estate is not a single investment, but a complex ecosystem of 18 different sub-sectors. At any time, some sectors might be performing well, such as the recent strong returns in data centers, senior housing, and single-family rentals. Other sectors might be more challenging, most notably the office market.
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