One method we utilize to determine if an investment has illiquidity risk is to calculate its autocorrelation of returns1. . Autocorrelation is a measurement of the relationship of one period’s return to the prior period’s return. A large positive autocorrelation indicates that the prior quarter’s return is predictive of the next quarter’s return. This usually happens when returns are based on smoothed appraisals, instead of an active trading market.
At .86, versus a maximum value of 1, the returns of open-ended real estate strategies, as represented by the NCREIF ODCE (Open End Diversified Equity) Real Estate benchmark, have among the highest levels of quarterly autocorrelation. The prior quarter’s return is highly predictive of the next quarter’s return.
Due to higher interest rates and lower demand for office space, open end real estate funds have been in a bear market since September 2022. Many of the underlying funds in the benchmark restrict redemptions. However, in the third quarter of 2024, ODCE’s return was +0.25%. In the fourth quarter, positive property appreciation occurred for the first time in over 2-years. Trailing returns for open end private real estate strategies, which have historically been predictive of future returns, have turned positive.