New market highs are often mistaken for late-cycle signals, but history suggests they more often mark the end of the beginning, not the beginning of the end. And in real estate market cycles, highs tend to occur not when risk is peaking, but when a prior valuation reset, early recovery dynamics, and strengthening fundamentals start to align.

After 1,078 trading days, U.S. REITs (FTSE NAREIT All Equity Total Return Index) reached new all-time highs on Friday, April 17. Importantly, these highs are being reached with meaningfully more attractive valuations than the last cycle, with implied cap rates near 5.8% versus 4.3% in December 2021. 

Three dynamics help explain why this new high reflects a new recovery, not the end of a cycle: 

First, commercial real estate (CRE) has already undergone a significant valuation reset, while many other public and private markets have yet to experience a comparable repricing. U.S. listed REITs, often early indicators of cycle inflections, declined 33% from their late 2021 peak to the October 2023 trough, but valuations are now roughly 52% above those lows. In private markets, CRE prices fell more than 20% at the bottom, but are now rising across all major indices, supported by improving credit market conditions and increased transaction activity. At the same time, distress, a classic lagging indicator, continues to edge higher, reflecting the long tail of the downturn. 

Second, signals from the U.S. listed REIT market indicate that real estate is transitioning from recovery to expansion, as valuations move above prior cycle highs. Historical cycle analysis suggests that real estate recoveries average roughly 2 years, while expansions typically last 12-13 years and are long, durable periods supported not only by price appreciation but also by underappreciated income growth (for further analysis, read: The (CRE)covery). The current cycle is unfolding in a largely textbook fashion, suggesting it remains early by historical standards. That said, it’s possible, if not likely, that U.S. listed REITs slip back into recovery in the near term, as is typical during early stages of an expansion.

Finally, the recovery is unlikely to follow a V-shaped or even U-shaped path, as seen after the Global Financial Crisis. Instead, the cycle appears increasingly K-shaped, with fundamentals diverging sharply beneath headline returns. While the overall index has surpassed its prior peak by 1.4%, only 10 of 18 property sectors are above their late 2021 levels. Performance dispersion is wide, with cumulative returns since that peak ranging from +92.3% for specialty sectors to 38.2% for office.

Taken together, the new highs in listed REITs are less a sign of excess than confirmation that the market has likely moved through the reset phase and into early expansion. With valuations still reasonable and fundamentals diverging across sectors, CRE outperformance in the period ahead will matter less about market timing and more about selectivity.