The gap between public and private real estate valuations is narrowing, signaling that investors are gearing up for increased transaction activity in 2025, according to a post on Globest.com.

Both sectors are moving toward alignment as public real estate investment trusts (REITs) post stronger returns, according to a new report from Nareit’s Senior Vice President of Research, Edward Pierzak.

Pierzak suggests that the ongoing convergence in valuations will make it easier to negotiate deals and boost market liquidity next year.

At the heart of the slowdown in transaction activity is the “cap rate spread,” which measures the difference between REIT-implied capitalization rates and private real estate appraisal cap rates.

When the spread is wide, it indicates that public and private investors are valuing properties differently, making financing more difficult. Disparate valuations force investors to either delay deals or risk overpaying for properties, which has slowed deal flow since 2022, as private market sellers remain hesitant to lower their prices.

As REIT returns strengthen, the spread is beginning to shrink, encouraging private market appraisals to follow suit. Pierzak also highlighted that fluctuations in U.S. 10-year Treasury yields have played a pivotal role in shifting valuations.

Historically, REIT returns move inversely with Treasury yields. In the third quarter of 2024, a decline in the 10-year yield drove REIT outperformance, narrowing the cap rate spread to 69 basis points—less than half the previous quarter’s level. This shift signals a potential return to normalcy, as the spread approaches historical averages seen before the valuation divergence began.

The improving valuation environment is a promising sign for real estate investors and dealmakers who have been sidelined by market uncertainty. As public and private valuations move closer together, property owners may become more willing to transact, and buyers may feel more confident about pricing.

This development could mark the end of a prolonged dislocation in real estate valuations. As private investors recalibrate their appraisals to reflect public market pricing, more deals are likely to move forward. If the current trend holds, the public-private valuation gap may finally close, restoring confidence and liquidity across the sector.

Nareit said it expects this alignment to fuel deal flow in 2025, especially if REIT performance continues its upward trajectory and the Federal Reserve manages to engineer a soft landing for the U.S. economy.