Private real estate returns in fourth quarter 2024, the lead-lad relationship with listed REITs and the shifting performance of private market property types.
This month, we are digging into the performance of the NCREIF ODCE index. Many institutional investors are benchmarked to this private CRE index, which makes it an important market barometer.
Key takeaways
- Private real estate, as tracked by the NCREIF ODCE index, posted positive total returns in the final quarter of 2024, underscoring our view that private CRE valuations have likely troughed.
- The outcome for private real estate since Covid echoes what occurred post the S&L and global financial crises. Indeed, an analysis shows that when total returns turn positive, they remain positive.
- The performance patterns of property types across private real estate are shifting. What worked last cycle (industrial and apartments), may not work as well this cycle.
1. Private CRE post two consecutive quarters of positive returns.
First, the NCREIF ODCE index posted positive net total returns of nearly one percent in the fourth quarter 2024.
As a quick review, ODCE stands for Open End Diversified Core Equity. The index tracks 25 private open-ended core funds, representing over $200 billon of commercial real estate assets.
This is the second consecutive quarter of positive total returns following the 0.02% increase last quarter. Net total returns were negative for seven straight quarters between the fourth quarter of 2022 and the second quarter of 2024.
Importantly, appreciation returns were also positive in the fourth quarter of 2024 for the first time since the second quarter of 2022.
EXHIBIT 1
Second consecutive quarter of positive private real estate returns
Appreciation returns turn positive for the first time since 2022
At December 31st, 2024. Source: NCREIF and Cohen & Steers. Data quoted represents past performance, which is no guarantee of future results.
This underscores our view that private CRE valuations have likely troughed. Indeed, an analysis of historical total returns post the S&L crisis in the early 1990s and post the global financial crisis shows that when total returns turn positive, they remain positive.
2. Historical lead-lag relationship of public and private real estate
The second point I’m watching is the relative performance between private CRE and listed REITs over the short, medium, and long term.
While ODCE returns rose in the fourth quarter, listed REITs declined by more than eight percentage points. This may seem like a significant difference at first glance, but there have been other quarters since the start of 2022 with greater dispersion in returns.
We don’t think quarterly returns tell the entire story. Listed REITs generated total returns of 5% in 2024, while ODCE was down 2% during the year. This follows a more than 25% return relative outperformance of listed REITs in 2023. By comparison, listed REITs declined 25% in 2022 while the ODCE index rose nearly 10%.
We’ve long argued that listed REITs are leading indicators in both downturns and recoveries, and this cycle has been no exception. Indeed, listed REITs have outperformed the ODCE index by forty percent since the third quarter of 2022.
EXHIBIT 2
Listed leads in downturns and recoveries
Listed REITs have rebounded in 2023 and 2024 YTD as private CRE declines
At December 31st, 2024. Source: NCREIF, Bloomberg and Cohen & Steers. Data quoted represents past performance, which is no guarantee of future results.
However, since the end of 2019, the price returns for listed REITs are similar to ODCE at -2.0%, versus -5.0%. In other words, while the path of travel was different, the end outcome since before COVID has been similar.
It’s worth noting that listed REITs produced superior total returns to ODCE over the cycle. They gained 18% compared to a 9% return for ODCE since 2019. This is consistent with our analysis that listed REITs historically outperform ODCE on a total return basis over the medium to long term.
3. Private Real Estate Returns by Property Type
Finally, we are digging into the performance of the ODCE index across property types.
Open air shopping centers (classified as “strips” by NCREIF) led with unlevered total returns of one point seven percent versus one point two percent for industrial as well as apartments and zero-point six percent for central business district office.
Industrial and apartments were also positive during the quarter, but office remained in negative territory with unlevered total returns of -0.7% and levered total returns of -3.2%.
This pushed full year unlevered total returns for strips to 5.2% compared to 2.5% for industrial, 1.5% for apartments and -9.4% for central business district office.
EXHIBIT 3
Sector performance patterns in private real estate – ODCE Unlevered
What worked last cycle, may not work this cycle
At December 31, 2024. Source: NCREIF and Cohen & Steers. Data quoted represents past performance, which is no guarantee of future results.
This is the second year in a row where open air shopping centers were the best performing property type, a sector that ODCE funds are underweight relative to industrial and apartments. Bottom line, we the think the performance patterns of property types across private real estate are shifting. What worked last cycle (industrial and apartments), may not work as well this cycle.
Bottom line, we the think the performance patterns of property types across private real estate are shifting. What worked last cycle (industrial and apartments), may not work as well this cycle.
Watch January 2025 The Real Estate Reel: The Real Estate Reel: Drivers of commercial real estate returns in 2025.
Watch all The Real Estate Reel videos.
FURTHER READING
The drivers of listed real estate’s strong start to the year
The absolute performance of listed REITs, their relative performance to the broader market and the drivers of the positive returns.
Why active management matters for listed real estate
Active managers of listed real estate funds have historically outperformed passive. We believe this is due to the inefficiency, diversity and complexity of listed real estate markets.
Strong foundations: The case for listed real estate
Listed real estate offers access to high-quality assets with strong growth potential, providing an efficient, liquid vehicle for investors seeking the unique benefits of real assets.
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