Values Remain Stable, Asset-Level Differentiation Rises in 3Q 2025: Webinar Highlights

Following several years defined by post-COVID surges, sharp cap-rate expansion and pronounced sector divergence, 2025 has delivered a period of relative stability for commercial real estate (CRE). That’s according to “Interpreting the Data: Current Valuation Trends and State of the CRE Market,” a webinar hosted by SitusAMC’s Real Estate Valuation Services (REVS) team on November 20.  

The event analyzed current valuation dynamics and sector performance across the NCREIF NFI-ODCE index. Drawing on transaction data, appraisal trends and net operating income (NOI) performance, the panel provided an in-depth look at key market shifts. The webinar featured Brian Velky, Global Head of REVS, Meredith Young, Director, Valuation Management, and Robyn Marshall, Director, Appraisal & Consulting. Here are key highlights: 

1. Income Dominates Returns as NOI Growth Turns Slightly Negative 

A historical breakdown of unlevered ODCE property-level total returns shows a market cycling from the strong appreciation of 2021, through cap-rate expansion in 2022, into today’s income-driven environment. Over the past several quarters, total returns have flattened, with little change in the cap-rate component and NOI growth drifting toward zero.  

The latest four-quarter moving average shows NOI growth dipping slightly negative for the first time since early 2021—an outlier period dominated by COVID-related impairment. Excluding that episode, NOI hasn’t been negative since 2Q 2011. Crucially, the downturn is almost entirely attributable to office, where one-year NOI is down roughly 10%. Across the other major sectors (industrial, multifamily, retail, and storage), NOI remains positive, though growth varies in momentum. 

At the fund level, income has accounted for roughly 90% of ODCE’s year-to-date return, underscoring how muted capital returns have become. While 3Q saw a negative capital-return print, panelists noted this was inconsistent with the broader pattern of value stabilization and warranted deeper review.  

2. Sector Dispersion Tightens to the Lowest Levels in 15 Years 
 
One defining feature of 2025 is the collapse in return dispersion across property types. In stark contrast to 2021, when industrial delivered nearly 15% annual total returns versus 1% to 2% for office and retail, recent quarters show returns clustered tightly in the 1% to 2% range. This is the lowest level of sector differentiation since 2011, driven by stable valuations, subdued rent swings and muted capital-market movement. With cap rates and market rents holding relatively steady—and office the only pronounced laggard—allocation has mattered far less than in prior years. 

Panelists emphasized that this shift places greater emphasis on asset selection, not allocation. Over the next three years, with limited expectation for major rate or value shifts, performance is likely to hinge on property-level actions: leasing wins, tenant credit, asset management execution, and localized market dynamics. 

3. Fund-Level Dispersion Spikes—But One Outlier Explains the Jump 

While property-type dispersion has collapsed, fund-level dispersion showed a notable—and confusing—jump in 3Q. NACREIF data indicated a level of divergence reminiscent of late 2021, which seemed inconsistent with today’s flat valuation environment. A deeper look revealed a single outlier fund driving the distortion. The total-return range between the best and worst performers spanned over 1,100 bps; removing the outlier compresses that to roughly 230 bps. Excluding the anomaly shifts ODCE appreciation from –26 bps to +12 bps, aligning with the modestly positive trend seen throughout 2025. 

Debt mark-to-market has also influenced quarterly performance. Treasuries ended the quarter near 4.1%, similar to 2Q, but mark-to-market movements contributed 20 to 25 bps of drag earlier in the year and are expected to create 5 to 10 bps of erosion in 4Q. Overall, the underlying trajectory remains one of stability rather than renewed value decline.  

4. Interest Rates Remain Volatile, but Medium-Term Expectations Steady 

The public-market backdrop remains generally constructive: Both the S&P 500 and public REIT indices have shown positive year-to-date returns, despite heightened volatility tied to tariff uncertainty, economic jitters, and a month-long government shutdown. Consumer sentiment has reversed course and is now improving, though nearly half of consumer spending continues to come from the top decile of earners, an important nuance during the holiday season.  

Rate-cut expectations, however, saw a dramatic swing. In mid-October, futures implied a 97% probability of a December cut. By early November, this had fallen to the 60s. As of the webinar date, probabilities had slipped to just under 40%. Still, markets anticipate meaningful easing by the end of 2026, with a roughly 74% probability of finishing at least 75 bps below current levels.  

For deal underwriting—particularly in sectors without immediate mark-to-market levers—panelists noted that investors continue to assume a stabilized 10-year Treasury between 3.5% and 4%, with current levels around 4.1% consistent with that thesis.  

5. Cap Rates Track Rates Closely—But Embedded NOI Growth Supports Values 

Over the past 30 years, ODCE cap rates and interest rates have maintained a strong correlation of ~0.8, with cap rates historically settling 20–30 bps above the 10-year yield. In recent data, this relationship inverted, with cap rates sitting roughly 30 bps below interest rates.  

Does this pose value risk? Panelists argued no—because of the embedded future NOI growth in ODCE portfolios. With two-thirds of index exposure in industrial and multifamily assets—both with meaningful mark-to-market tailwinds—embedded growth supports 75–100 bps of cushion relative to T-3 cap rates. 

Floating-rate debt exposure (20 to 25% of ODCE leverage) explains roughly 100 bps of the recent 150-bp rise in debt costs since 2022, but easing expectations could provide relief. If Treasury rates stabilize near 3.25 to 3.50%, cap-rate pressure should remain limited. 

6. Debt Markets Show Renewed Activity at Lower Costs  

ODCE leverage sits near 26%, with approximately half coming from property-level mortgages and half from unsecured private-placement structures. Private-placement activity totaled $2.8 billion year-to-date, with 2Q the most active period at over $1.25 billion. 

A notable trend: cost of capital has declined into the 5% range for 4Q financings, reflecting both falling base rates and tightening spreads. Weighted-average debt tenor has lengthened, moving from shorter durations earlier in the year to 8-plus-year structures in 3Q and 4Q, signaling lender and borrower comfort with the current rate environment. 

7. Price-to-Value Alignment Tightens as Transaction Volume Rises  

Transaction volume surged in 3Q, surpassing the combined total of 1Q and 2Q. Year-to-date, ODCE disposals total $11.2 billion. Sales prices were within ~1% of prior-quarter appraised values, tightening from a 2% variance last quarter. To contextualize this, panelists examined pricing relative to the 2Q 2022 peak: 

• Apartments: 2025 sales are ~23% below peak—remarkably consistent with 2023 to 2024 levels. 

• Retail: Highly segmented; malls and grocery-anchored assets exhibit divergent pricing. Retail represents only 10 to 15% of ODCE but accounts for an outsized share of 2025 sales ($3B). 

• Office: Largest discount relative to peak values and the heaviest influence on aggregate metrics due to higher transaction volume. 

• Industrial: More modest repricing, consistent with broader market resilience. 
  

These patterns reinforce that disposition pipelines reflect selective motivations and asset-specific factors, making retained-asset values an imperfect comparison set.  

8. Valuation Inputs Hold Steady Across Property Types 

The panel presented 3Q NACREIF valuation metrics, which were essentially unchanged: 

• Discount rate: down 2 bps to 7.33% 

• Terminal cap rate: down 1 bp to 5.83% 

• Going-in cap rate: up 3 bps to 4.71% 
  

Panelists described this as a continuation of the roll-forward environment seen throughout 2025. Minor sector nuances include retail, which saw a slight decline in percent leased due to a major mall transaction entering the dataset. Meanwhile, industrial is experiencing softening rents in Southern California, though long-term trajectory remains positive. Life science is seeing continued pockets of weakness. The panel cited stable long-term fundamentals for the apartment sector, albeit with some regulatory noise in metros such as Denver. Expectations for 4Q call for similar stability, with modest adjustments driven by incremental rent movement rather than cap-rate shifts.  

9. NOI Growth Trends Underline Sector Differences 

Trailing NOI growth has dipped modestly negative at the index level, but the details reveal a differentiated landscape. Office is seeing the largest drag due to declining occupancy and life-science softness. Some rent softening is occurring in industrial, but the sector shows strong long-term mark-to-market potential. Multifamily surprised with a slight downturn over the past year, attributed to new-supply lease-ups and concessions; long-term the  trajectory remains favorable. Retail is seeing stable fundamentals across most sub-sectors. Overall, NOI growth is expected to re-accelerate gradually as supply pipelines ease and property-level leasing progresses.  

Looking Ahead: A “Boring but Good” Return Environment 

Unlike the post-GFC cycle, no major cap-rate compression appears likely. While spread widening is expected—from ~50 bps today to 100–125 bps over the next two years—the REVS team does not foresee a dramatic value surge unless capital-market conditions shift materially below current expectations. SitusAMC’s forward-looking forecast anticipates capital appreciation of about 2% annually, income return of 4% to 5% and unlevered property-level total returns of 6% to 7% over the next three years.  In short, CRE looks poised to deliver steady, income-led performance, with limited volatility and growing emphasis on asset-level execution.   

Watch a recording of the webinar here or download the slides here. For more information on SitusAMC’s Real Estate Valuation Services, visit our website.