StepStone Real Estate Liquidity Insights

Key takeaways

• Higher interest rates since 2022 have lifted cap rates and pushed down property trading prices, but appraisal-based carrying values for many fund assets, especially in the US, still reflect much lower cap rates, leaving these funds overvalued.
• Non-core fund distributions have run at around half of long-term averages for three years as managers delay asset sales to avoid recognizing losses.
• When non-core funds do sell, the valuation gap surfaces: assets sold in 2025 realized an average loss of 28%.
• Non-core fund capital calls are back in line with long-term averages, driven by new opportunities (including motivated sales) and by funding for legacy assets held longer.
• Apart from mega funds (greater than US$5 billion), fundraising has been flat for three years at around 2016 levels.

Interest rate spike created persistent challenges. 2022 interest rate spike led to a drop in property trading prices, systemic overleverage, and funding gaps. Market trading volume dropped and mostly recovered. Assets sales by funds fell much further than market trading volume and have not recovered.

Prices down, valuation gap. Higher interest rates lifted cap rates. However, appraisal-based carrying values for many fund assets, especially in US, are based on cap rates much lower than typical trading prices, leaving these funds overvalued.

Distributions low. Non-core fund distributions have been around half of long-term averages for three years. This is because asset sales have dropped by a roughly similar amount. Managers are holding assets longer, hoping to grow income and eventually overcome the drop in prices.

Capital calls at normal levels. Non-core fund capital calls are back in-line with long-term averages, driven by new opportunities (including motivated sales resulting from balance sheet challenges) plus funding of legacy assets amid extended hold periods.

Realized loss ratios surging. Realized loss ratios demonstrate the gap between trading prices and carrying values as sales trigger loss recognition. Assets sold by non-core funds in 2025 realized an average loss of 28%. Avoiding losses, enabled by the valuation mismatch, motivates longer holds, which are bolstered by hopes of value recovery.

Funds struggle to raise capital. Apart from mega funds (>$5B), fundraising has been flat for 3 years around 2016 levels.

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