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Market Update

Quarterly market review- Q3 2023

During the third quarter of 2023, we observed negative performance across the major markets, including commercial real estate, highlighting the complex interplay of macroeconomic factors that pushed interest rates higher. Although we were hopeful that interest rate volatility, especially at the longer end of the curve, was settling down, that was not the case as the 10-yr Treasury saw an increase of about 80 bps over the quarter. This sharp increase in rates resulted in negative performance for most asset classes.

Q3 2023 Benchmark Returns

  • -3.23% Bloomberg U.S. Agg Bond Index TR
  • -3.27% S&P 500 TR
  • -7.02% MSCI US REIT Index GR
  • -2.16% NFI-ODCE NR

Private real estate’s negative performance (as measured by the NFI-ODCE NR) for the quarter, although disappointing, is not without its silver lining. Returns have continued to improve each quarter this calendar year. We continue to observe tenacity in the operating fundamentals of the industrial and multi-family property types, as well as, to some extent, retail. Office again experienced large write-downs, but we believe office valuations will have a much less meaningful impact on overall performance moving forward.

The major driver of negative returns for the quarter continues to be the quick rise of interest rates across the yield curve, which has pushed cap and discount rates higher across all property types. At the September FOMC meeting, Fed Chairman Powell finally convinced the markets that interest rates may be higher for longer. The Fed’s hawkish outlook, along with many technical factors present in the Treasury market, including record issuance, sent the 10-yr Treasury up 50 bps in the month of September alone, and almost 80 bps for the quarter. Interestingly, the Federal Reserve is taking interest rates higher in a time when the U.S. Treasury is issuing debt to cover record deficits from fiscal spending. This may not be sustainable for the longer term and could ultimately have to be resolved through lower fiscal spending or a reduction in interest rates. At this point, we believe the Fed may hike rates one more time, but the interest rate hiking cycle could be over by year-end with cuts coming by the end of 2024.

To be clear, we do not believe that interest rates will need to decrease for private core real estate to turn positive. During previous periods of rising rates, core real estate returns have outperformed largely due to the strength of income growth — driven by a strong economic backdrop — offsetting the impact of higher interest rates on cap rates. We expect continued improvement in returns due to the strong operating fundamentals with respect to occupancy rates and rent growth. The underlying funds are also benefiting from low leverage at a predominantly fixed rate. However, we may still need more certainty about when the Federal Reserve would be finished increasing rates to ultimately reach positive territory.

Below is a brief summary of performance by property type:

  • Industrial Industrial returns varied across different fund portfolios. Rising interest rates continued to push cap rates higher, but rent growth continues to be above long-term averages, highlighting the sector’s inherent resilience.
  • Multi-family — Despite the slight negative returns due to rising cap rates, persistent rent growth underscores the sector's vitality. Additionally, the long end of the yield curve increasing substantially over the quarter continues to make homeownership even more unattainable for many, which bodes well for multi-family housing for the coming years.
  • Office — Office properties have borne the brunt of valuation write-downs during this downturn. Many properties in the NFI-ODCE have now been written down between 30-40%. With such declines already factored in, we expect office returns to have a much less meaningful impact on overall core real estate performance moving forward.
  • Retail — The retail sector, after seeing valuation declines for the previous decade, is benefiting from a strong economy and consumer spending. As a result, NOI growth has been strong across many retail properties within the NFI-ODCE.
  • Specialty — The allure of specialty sectors like self-storage, life science, and single-family residential persists across many institutional buyers. Noteworthy performance in life sciences and single-family residential segments underscores their strategic value in a diversified real estate portfolio.


Looking ahead, we remain cautiously optimistic. The anticipated easing in the Federal Reserve’s interest rate hikes, coupled with persistent strength in select real estate sectors, could pave the way for a rebound in overall private real estate performance in 2024. Additionally, the fact that new construction has slowed dramatically from the spike in financing costs should not be overlooked. While this will take time to cycle through the economy, as interest rates begin to ease and limited new supply comes online, private commercial real estate could see above average performance in the coming years.

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Cap rate represents the annual rate of return on based on the income that the property is expected 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 123 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