We’ve talked recently about the imperative to diversify beyond the stock market and cryptos in 2025, at the outset of a new administration in Washington. Should investors access the asset class through publicly traded REITs or private-market investments? While both options provide real estate exposure, their performance characteristics, risk profiles, and portfolio implications differ significantly.
Understanding these distinctions has never been more important as investors navigate an environment of elevated market volatility and concentrated risk in public markets. While both traded REITs and private-market real estate may belong in a given investor’s portfolio, we argue that this moment calls for greater exposure to private-market CRE assets.
Tale of Two Markets: Understanding the Fundamental Differences
The most obvious and critical difference between private-market real estate and traded REITs: traded REITs are, well, traded. Major REITs are liquid and offer a low barrier to entry, which is a good thing for many investors. They do tend to offer exposure to a different sector than most stocks and ETFs. However, traded REITs tend to exhibit the same behavior as traded stocks: share value can reflect not just the underlying economics, but also swings in sentiment, sometimes being influenced by a volatile news cycle. As such, traded REITs may correlate more highly with the broad performance of the stock market.
Private-market real estate (of the sort offered by EquityMultiple, for example) is illiquid, with returns driven more by real demand in the economy and demographic shifts. Property-level rents may offer cash flow, and total return possibilities are driven by inefficiencies in slower moving markets. As such, private-market real estate may correlate less with the stock market.
That said, let’s take a look at some recent performance and dynamics of large, traded REITs.
Public REITs: Market Sentiment Drives Valuation
An analysis of the top 10 publicly traded REITs by market capitalization illustrates their high correlation with broader market movements:
Prologis (PLD):
- Beta of 1.2 relative to S&P 500
- 30-day volatility averaging 22% in 2024
- Price/NAV premium of 15%
American Tower (AMT):
- Beta of 0.9
- Correlation of 0.65 with tech sector
- 25% price swing during 2024 rate uncertainty
Equinix (EQIX):
- Beta of 1.1
- Data center sector premium of 22%
- High correlation (0.72) with tech stocks
These leading REITs demonstrate how public market vehicles can exhibit some of the same volatility as stocks. While public REITs own high-quality real estate portfolios, their stock prices often move more in tandem with broader equity markets than underlying property values:
- REIT price movements show a correlation of 0.71 with the S&P 500
- During the 2022-2023 market turbulence, major REITs experienced price swings 2-3x larger than changes in their underlying property values
- Premium properties in REIT portfolios now trade at cap rate spreads of 75-150 basis points versus average assets, reflecting market sentiment more than property-level fundamentals
Private-Market Real Estate: Fundamentals Drive Returns
In contrast, private-market real estate values typically reflect local market conditions and property-level performance:
- National vacancy rates of 5.7% (below the historical 6.7% average) directly impact property income
- Construction starts declined 45% from 2021 peaks, creating supply-driven opportunities
- Property values respond to local supply-demand dynamics rather than national market sentiment
Broadly speaking, real estate private equity and real estate private credit (debt-based investments) offer a double-edged investment thesis in this moment. While values of CRE asset classes (e.g. multifamily) are down between 15% and 25% from the pre-2022 peak, falling interest rates would almost automatically drive value back up, creating a “buy low” opportunity. However, if rates and bond yields remain elevated, the rates that private real estate lenders can command will also remain elevated, creating opportunities to tap into attractive yield alongside the stability of debt positions that are secured by underlying property. EquityMultiple’s Ascent Income Fund gives individual investors the opportunity to tap into this investment thesis.
Think about it at a very basic level, from the standpoint of a value investor. Since mid-2022 or so, the S&P is up over 50%, and CRE values are down about 20%. Where is your “buy low” opportunity?
Legislative Agenda and Market Volatility in 2025
The incoming administration’s policy agenda introduces new variables that could amplify public market volatility:
- Potential protectionist trade measures could impact supply chains and inflation
- Corporate tax policy changes may create sector-specific winners and losers
- Immigration policy shifts could affect labor markets and construction costs
- New regulatory frameworks could particularly impact tech and financial sectors
These policy shifts have particular implications for publicly traded REITs, which often trade based on market sentiment rather than underlying property fundamentals. Meanwhile, KKR’s comprehensive analysis reveals how different portfolio constructions perform across market cycles:
- Institutional portfolios with significant private real estate exposure achieved a Sharpe ratio of 1.18 versus 0.73 for traditional 60/40 portfolios
- During high-inflation periods, institutional portfolios showed both higher returns (6.9% vs 1.5%) and lower volatility (8.6% vs 12.5%) compared to 60/40 portfolios
- Private wealth portfolios incorporating real estate maintained steady cash yields between 3.1-3.7% across different market environments
Performance Characteristics: A Data-Driven Comparison
Volatility and Correlation
Historical data reveals stark differences in return patterns:
Public REITs:
- Average 30-day volatility comparable to broader equity markets (15-20%)
- High correlation with stock market movements, particularly during stress periods
- Intraday trading allows for rapid price movements disconnected from underlying assets
Private-Market Real Estate:
- Significantly lower volatility (10.6% for private portfolios vs. 12.7% for public markets)
- Low correlation with public equities, providing true diversification benefits
- Valuations based on actual transactions and property-level metrics
Income Generation
The income component of returns also shows meaningful differences:
Public REITs:
- Required to distribute 90% of taxable income
- Dividend yields typically range from 3-6%
- Distributions subject to market sentiment and capital market conditions
Private-Market Real Estate:
- Cash yields of 3.2-3.7% even during high-inflation periods
- Income backed by actual lease payments rather than market trading
- Greater flexibility in distribution timing and capital retention
Current Market Opportunity Set
The present market environment highlights key distinctions in opportunity access:
Public REITs
- Limited to large, established property sectors
- Concentrated in major markets and premium properties
- Trading at significant premiums to net asset value in some sectors
Private-Market Real Estate
- Access to emerging sectors and niche opportunities
- Ability to target specific market dislocations
- Currently benefiting from regional bank pullback (18% decline in CRE exposure through 2024)
Market Environment and Correlation Analysis
The KKR data provides compelling evidence for private real estate’s diversification benefits:
High Inflation Environments:
- 60/40 portfolios: 1.5% return, 12.5% volatility, 0.12 Sharpe ratio
- Institutional portfolios with private real estate: 6.9% return, 8.6% volatility, 0.80 Sharpe ratio
- Private wealth portfolios: 5.3% return, 9.1% volatility, 0.57 Sharpe ratio
Low Inflation Environments:
- Traditional portfolios maintain higher correlation with public markets
- Private real estate portfolios demonstrate more stable performance metrics
- Cash yields remain consistent regardless of market environment
This data underscores how private real estate can provide genuine diversification benefits that publicly traded REITs, with their higher market correlations, cannot fully replicate.
But why does decorrelation matter? In fancy terms, this is the basis of ‘modern portfolio theory’, which Dr. Harry Markowitz pioneered in the 1950’s: it is mathematically provable that reducing the correlation between asset classes within a given investor’s portfolio can increase portfolio-level returns for any given level of risk, or reduce risk for any given level of return (i.e. improve risk-adjusted return). In less fancy terms: don’t put all your eggs in one basket.
This may be particularly important now, as many investors are increasingly reliant on the performance of tech stocks, like Meta (META) and Apple (AAPL), to carry their portfolio.
A recent KKR study shows the potential risk-adjusted return boost of adding a meaningful percentage of “private-market” assets to a portfolio.
Implementation Considerations
Public REIT Investment
Key factors:
- Trading costs and market impact
- Sector and geographic concentration
- Dividend tax treatment
- Market timing risk
Private-Market Investment
Important considerations:
- Investment minimums
- Liquidity constraints
- Sponsor/operator quality
- Fee structures and alignment
- Platform technology and reporting
Conclusion
While both public REITs and private-market real estate offer property exposure, their distinct characteristics serve different portfolio needs. Public REITs provide liquidity and ease of access but come with higher correlation to public markets and greater volatility. Private-market real estate, while requiring longer holding periods, offers true diversification benefits and returns more closely tied to property fundamentals.
For investors seeking to optimize their real estate exposure, a thoughtful combination of both may be appropriate, with private-market allocations serving as a portfolio stabilizer and public REITs offering tactical flexibility. The key lies in understanding each vehicle’s characteristics and aligning them with individual investment objectives and constraints.
EquityMultiple offers individual investors the opportunity to tap into vetted, fractional, private-market commercial real estate at minimums as low as $5K.