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Market Update

Quarterly market review- Q2 2023

As the market continued to reward equity investors during the second quarter, private real estate continued to face headwinds.

While we are disappointed that private real estate posted another negative return for the quarter, we continue to see operating fundamentals across industrial, multi-family, and retail remain strong. Although office now represents less than 20% of the NFI-ODCE, it has been the biggest detractor to performance over the past 12 months, and during this quarter we saw broad write-downs across almost all office assets within the index. At this point, even the highest quality office assets within the NFI-ODCE have been written down between 20-30%. These write-downs are a result of a prudent appraisal process designed to mark assets at fair value, which has become increasingly challenging in the current environment with very limited transaction volume. Ironically, in the last two weeks of the quarter, we did see a large transaction in a New York City Class-A office that transacted at a 4.0% cap rate, representing a value far higher than many expected in this higher interest rate environment. This is a sign that high quality Class-A office, which is the NFI-ODCE’s focus in this sector, is still highly sought after, and should help stabilize downward pressure on its valuations.

As the Federal Reserve’s interest rate policy has dominated the headlines, it has become increasingly clear that the end of the tightening cycle may be within sight. Even by the Federal Reserve’s own prediction, rates will likely start to decrease in 2024. While higher rates for longer have been necessary to bring inflation down, there are signs that it is starting to take hold. That said, the Fed may still need to hike rates one or two more times. Overall, the reason that rates have been held at higher levels than previously anticipated is due to the resiliency that the U.S. economy has demonstrated. However, there are signs that the economy is slowing, and we believe inflation will continue to trend down. As soon as the Federal Reserve signals the end to rate hikes, we believe commercial real estate investors will be rewarded as historical data would indicate.

As it relates to private commercial real estate, the highest quality commercial real estate continues to hold up well. Overall values did decline for the third consecutive quarter primarily due to continued cap rate expansion, especially within office. However, on a more positive note, we saw many industrial and multi-family assets appreciate in value. In fact, although the NFI-ODCE was down by 2.84%, a number of funds declined by less than 1%. We anticipate a number of funds will be flat to positive in the 3rd quarter and then return to normalized returns by the 4th quarter of this year.

Below is a brief summary of performance by property type:

  • Industrial properties’ return was mixed, with some managers reporting slightly positive returns while others reported slight losses. Cap rates continued to expand as a result of higher interest rates but to a lesser extent than other sectors, much of which was essentially offset by income.
  • Multi-family returns were slightly negative as cap rates pushed higher in this sector as well. Rent growth persists but it has moderated from the historically high levels experienced last year. That said, the high single-digit rent growth many are currently reporting is still well above the 3% rent growth the property type has historically experienced. The supply-demand dynamics for housing in the U.S. continue to make this sector attractive from a longer-term perspective.
  • Office properties were substantially negative for the quarter as cap rates and discount rates continue to expand. The NFI-ODCE funds have now written down office values by at least 20-30% across almost all assets, with lesser-quality assets being written down much more significantly.
  • Retail properties continue to experience meaningful increases in net operating income (NOI), continuing the trend of the past three quarters.
  • Specialty property sectors such as self-storage, life science, and single-family residential continue to see strong demand from institutional investors. Notably, life sciences and single-family residential experienced strong relative returns over the quarter.

What is a good entry point for core commercial real estate?

While we are not proponents of timing any asset class, looking to history may be informative. The NFI-ODCE has not suffered many substantial losses going back to its inception in 1978, but the Global Financial Crisis was the most pronounced. When evaluating the appropriate entry point during that period (2009-2010), investors were better off investing early rather than late.

The following chart demonstrates investors subsequent 10-year return when investing before the trough, at the trough, or following the trough. Investing one quarter prior to the trough was more beneficial than waiting until one quarter after, with quickly diminishing returns each quarter after the trough.

We believe we could be in a similar scenario today, barring any unexpected market events. While it is possible to have another slightly negative quarter, we believe now is the time to consider making an allocation to the asset class, as we are likely close to the trough.

Contact us for more information


Cap rate represents the expected annual rate of return on based on the income that the property is forecasted to generate.

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.

MSCI U.S. REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs. With 126 constituents, it represents about 99% of the US REIT universe and securities are classified in the Equity REITs Industry (under the Real Estate sector) according to the Global Industry Classification Standard (GICS®). It however excludes Mortgage REIT and selected Specialized REITs.

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.

Past Performance is no guarantee of future results. One cannot invest directly in an index.

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.

About the author

  • Thomas Miller

    Managing Director
    USQ Interval Funds

    Kennett Square, PA