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Why consider core private real estate in 2024?

October 23, 2023
  • Thomas Miller for USQ


    Thomas Miller

    Managing Director
    USQ Interval Funds

    Kennett Square, PA


In an investment landscape that has seemingly rewarded equity investors and posed challenges for commercial real estate, the allure of private core real estate remains steadfast. As we approach the new year, exploring the reasons to consider investing in private core real estate is not only prudent but also strategic for investors seeking to navigate the intricate dance of market dynamics. While recent market commentary underscores the headwinds faced by the broader sector overall, a closer look at private core real estate’s resilience, income potential, and possible entry points highlights its value in the coming year.

Historical performance and outlook

Recently, the news media has broadly painted commercial real estate in a bad light. However, most core commercial real estate (industrial, multi-family, and retail) is continuing to experience strong operating fundamentals, including high occupancy rates and above average rent growth. The one sector of commercial real estate that has struggled—and which makes up less than 20% of the overall market—is the office sector. Bright spots are emerging, though it is likely the property type, especially for lower quality assets, faces additional headwinds. That said, in most cases, even the highest quality Class A office assets within the NCREIF Fund Index – Open-end Diversified Core Equity (the “NFI-ODCE”) have been marked down considerably from their recent peaks, making any future markdowns much less meaningful as it relates to the overall performance of the asset class.

It is important to remember that private core real estate is delivering on its ability to be a truly diversifying asset class. Consider, for example, calendar year 2022. When almost every asset class experienced negative returns, including fixed income1, which experienced a decline of -13.01%, core private real estate2 delivered a positive return of +6.55%. And while YTD3 the asset class is down -6.16%, other asset classes in a well-diversified portfolio are delivering positive returns. This is the purpose of diversifying a portfolio, although it is easy to lose sight of this benefit when we see declines.

Source: NCREIF, Morningstar

Historical stability and current state

One of the most compelling reasons to consider private core real estate is the stability it has provided over the past five decades. As the chart below depicts, private core commercial real estate has only experienced three drawdowns since 1978. The two drawdowns prior to 2023 occurred in the early 90’s and then again during the Global Financial Crisis (GFC). Interestingly, both of those drawdowns were characterized by prior periods of over-leverage which led to over-supply, factors that are predominantly absent in the current drawdown.

Source: NCREIF, Morningstar

Rather, the U.S. Federal Reserve Bank’s quest to stamp out inflation has led them to raise interest rates by over 500 basis points in a relatively short period of time. As a result, transaction volume has seemingly halted in commercial real estate as higher financing costs have taken prospective buyers out of the market and slowed new development. The good news is that many of the properties in private core real estate—specifically in the NFI-ODCE—are unencumbered. The NFI-ODCE funds employ relatively lower leverage, utilizing long-dated debt on more stabilized properties. This means most owners will not face refinancing pressure until 2026+.

Source: FRED®, Federal Reserve Bank of St. Louis;

A potentially attractive entry point

That said, while prices have certainly adjusted over the previous year to estimate the impact of rising interest rates, the return outlook for the sector is brightening. This will remain somewhat uncertain until interest rates settle and transaction volumes return to normal levels, but the recent drawdown may be an attractive entry point. Additionally, while rental income growth has slowed recently, it is still at or above its long-term averages and, as such, most commercial real estate sectors and properties have been able to increase rents during this inflationary period, helping to offset a portion of the potential value declines. The ability to raise rents in these types of environments is what makes commercial real estate more resilient to rising interest rates than other major asset classes, especially fixed income.

Naturally, the question that many market participants have been pondering is when rate cuts will begin. We will not claim to have a crystal ball, however, inflation is slowing, and it will be difficult for the federal government to sustain the burden from its rising debt service as a result of the higher level of interest rates. Although the Fed has been hawkish in its tone and seems willing to raise interest rates again, it is worth noting that even by its own projections, the Fed is anticipating rate cuts beginning in 2024.

Source: Federal Reserve Board, September 20, 2023


In 2023 the NFI-ODCE experienced one of only three significant drawdowns in its history. After each of the previous two drawdowns, private core real estate benefited from long periods of positive returns; in both cases, the asset class consecutively delivered positive quarterly returns for a period of 10+ years. Additionally, while it has not been supply/demand issues driving prices down but rather rising interest rates, a decrease or even stabilization of rates should make the environment in 2024 favorable for commercial real estate investors.

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With the prospect of rate decreases in the forecast, a resilient U.S. economy, and low unemployment rate (even before considering the Fed’s projection of 4% in the coming year), the environment for commercial real estate could go from challenged to favorable very quickly. Even just the anticipated conclusion of rate hikes could reward commercial real estate investors, as historical data suggests. As the chart below depicts, commercial real estate has typically performed well over most rate environments, even during periods of rising rates. This period of rising rates has been unique in that the pace of the increases has been historic, resulting in valuation declines. However, the vast majority of those declines should now be behind us. That, coupled with the previously mentioned strong operating fundamentals, should allow the asset class to get back to positive returns throughout 2024.


With that said, there are only a few outcomes for the path of interest rates: they can continue to increase, stay flat, or decrease. Below we summarize the impact each interest rate path is likely to have on commercial real estate:

Rates continue to rise

While this scenario is a possibility, we believe the probability is low. The Fed’s main concern is bringing down inflation, and one of the biggest contributors to Consumer Price Index (CPI) inflation is the impact of shelter costs. As the chart below shows, real time rents (Zillow) have returned to long-term averages. This is not yet reflected in the current CPI data but is likely to appear in the coming quarters, as it typically lags by 12-18 months. Since this accounts for nearly 40% of CPI, we expect CPI is likely to continue its downward trend, though it may not be perfectly linear. That said, should rates continue to rise, it will be a result of persistent inflation, allowing commercial real estate owners to continue to increase rents. For this reason, commercial real estate should be more resilient than other asset classes such as bonds, which have no ability to increase income.

Source: Zillow, U.S. Bureau of Labor Statistics

Rates stay flat

After the hyperbolic lift in interest rates, this is the likely scenario for the remaining part of 2023 and first half of 2024. If so, private commercial real estate returns should normalize to long-term averages. While there may initially be a bit more downward pressure as transaction volumes start to pick up with sellers and buyers finding a middle ground, the high demand for core commercial real estate should quickly resolve any pricing dislocations.

Rates decline

As previously mentioned, even the hawkish Fed has projected a decrease in interest rates by the end of 2024. If this happens, investors will quickly look for alternatives that provide a reliable yield and potential long-term growth. Private core real estate has long been a favorite for pensions, institutions, and high net worth investors and will likely take in a considerable amount of capital very quickly in such an environment.


In most investing landscapes, private core real estate stands resilient, beckoning investors with its income potential, diversification benefits, and emerging opportunities. As the coming year ushers in both uncertainty and promise, the merits of private core real estate should not be overlooked. By considering this asset class, investors may be able to secure a pathway to stable returns, portfolio diversification, and the potential for long-term growth. However, it remains paramount as always for investors to conduct thorough research, exercise due diligence, and align investment choices with their financial goals.

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1 represented by the Bloomberg U.S. Aggregate Bond Index

2 represented by the NFI-ODCE NR

3 through June 30, 2023

Risk disclosures

Union Square Capital Partners, LLC is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Past performance does not guarantee future results.

There are a number of significant risks that should be considered when considering an investment in real estate or real estate related securities. No amount of diversification or correlation can guarantee profit or prevent losses. This website is neither an offer to sell nor a solicitation of an offer to buy any securities. An offering is made only by the applicable offering documents or Prospectus and only in those jurisdictions where permitted by law. This website must be read in conjunction with the applicable offering documents or Prospectus in order to understand fully all of the implications and risks of the offering of securities to which it relates and a copy of the offering documents or Prospectus must be available to you in connection with any offering. All information contained in this website is qualified by the terms of applicable offering documents or Prospectus. Neither the United States Securities and Exchange Commission nor any state regulator has approved or disapproved of the merits of any offering described herein. Any representation to the contrary is unlawful.

The information and opinions expressed are as of the date indicated, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by USQ to be reliable, but are not all inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by USQ, its officers, employees, affiliates or agents. Reliance upon information in this material is at the sole discretion of the reader.


  • Bloomberg U.S. Aggregate Bond Index is an unmanaged market value-weighted index for U.S. dollar denominated investment- grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year.
  • NCREIF Fund Index — Open-end Diversified Core Equity (NFI-ODCE) consists of private real estate equity funds that meet certain criteria with respect to such things as leverage (less than 35%), operations (at least 75% invested in properties that are 75% or more leased), sector and geographic diversification, and investment in core real estate (at least 75% in office, industrial, apartment and retail properties).
  • S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

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