Cohen & Steers built its name on public real estate. Its CEO says the future is proving private markets need public ones, too.

Cohen & Steers, which built its reputation on investing in publicly traded real estate, is increasingly applying that expertise to private markets, according to an interview with Pensions & Investments with CEO Joe Harvey and Seth Laughlin, senior vice president and head of real estate strategy and research. Harvey, who joined the firm as its sixth employee when it managed roughly $250 million, described the current backdrop as the early part of a new cycle. Laughlin noted that after the pandemic, demand moved toward apartments and industrial properties, supply followed, and rates rose sharply in 2022 just as that supply arrived. Construction is now slowing across much of the market, while shopping centers and office have very little new supply and data centers face extraordinary demand. Listed REITs have performed positively despite elevated inflation and rising Treasury yields.

On rates, Harvey said replacement costs have become more important as construction costs rise, which makes new development less attractive. He compared an index of replacement costs with REIT share prices, noting that after the global financial crisis REITs generally traded above that measure, while share prices are now roughly 20% below it. Laughlin cautioned that higher rates still matter, though 25 to 50 basis point moves are not necessarily a death knell for REITs and exposure must be assessed sector by sector.

Harvey said apartments concern the firm because private valuations stayed high even as rent and cash flow growth flattened, and refinancing at borrowing costs around 6.5% on assets valued at mid-4% to 5% cap rates creates difficult math that could force owners to add equity or sell. Industrial growth has held up better. Grocery-anchored shopping centers, which Harvey called a secular rather than early-cycle opportunity, have been bought at roughly two-thirds of replacement cost and are about 97% occupied. In data centers the firm prefers listed exposure, while it favors listed senior housing on demographics but is less inclined to own it privately due to operating risk. The firm has moved overweight listed office after years underweight, with selective private office investments possible in parts of New York, Dallas and San Francisco.

Harvey argued institutions should own both listed and private real estate because they are out of phase in returns, yet institutional real assets portfolios remain dominated by private investments. He said investors have not necessarily earned a premium for going private in areas such as core real estate and need to better price illiquidity, particularly as total portfolio approaches require greater liquidity to shift exposures.