Investors have priced in a negative, forward-looking view of listed real estate. Slowing growth and higher inflation created a stagflationary backdrop that's especially challenging for REITs. The result was a significant performance disparity between listed and private real estate in 2022.
REITs, as measured by the FTSE Nareit All Equity REITs index, were down 27.9% through the third quarter 2022 and -24.9% through December. In contrast, the NCREIF ODCE index, a quarterly measure of private real estate, was up 7.5% in 2022.
While these return metrics are anticipated, the gap is unlikely to persist as listed real estate is a leading indicator for private valuations. Indeed, private real estate returns are beginning to slow. The NCREIF ODCE index posted fourth quarter 2022 total returns of -4.97%, its biggest quarterly decline since 2009 and the fifth greatest since 1978. This follows the 0.5% gain in the third quarter of 2022, representing a deceleration from its 7.4% return in the first quarter and a 4.8% return in the second quarter. Listed REITs, on the other hand, were up 4.1% in the fourth quarter of 2022 and up 10.1% last month, one of the best starts to the year since 1995. Bottom line, at the end of January 2023, listed REITs stood more than 21% above their 2022 lows just as private valuations are just starting to reset lower.
This is a key reason why non-traded REITs, or NTRs, have been in the news lately; investors are rebalancing their private real estate holdings, leading NTRs to limit redemptions. By understanding this lead versus lag relationship, investors can tactically allocate at different times across the two asset classes.