Core Insights - Cap rates are a significant indicator of future returns in REITs, with higher cap rates generally leading to higher forward returns [1] - It is advisable to buy REITs when they are trading at high implied cap rates and avoid purchasing when they are at low implied cap rates [2] - The implied cap rate is calculated as the net operating income (NOI) divided by the price of the property or enterprise value for publicly traded REITs [3] Market Performance - REITs peaked at the end of 2021 with an implied cap rate of about 6%, which is considered low by historical standards [4][5] - The rise in the 10-year Treasury yield from 1% to around 4% has negatively impacted the valuation of REITs, leading to a correction in prices [7][9] - The current median implied cap rate for REITs is 7.7%, indicating a healthy spread over the Treasury yield, with solid underlying real estate fundamentals [10] Sector Analysis - Publicly traded REITs are currently trading below the private value of their underlying real estate, suggesting a potential opportunity for investment [19] - Different property types exhibit varying cap rates, with multifamily, office, retail, industrial, and hotel sectors showing distinct ranges [17] - Industrial and shopping center sectors are highlighted as having high growth potential, while self-storage is noted for being oversupplied and undervalued [21][27] Investment Strategy - The current valuation suggests that public REITs may outperform private real estate investments going forward [20] - The 2nd Market Capital High Yield Portfolio is significantly overweight in industrial and retail sectors while avoiding self-storage [28] - Investors should focus on sectors with favorable combinations of value and growth to maximize returns [28]