Commercial real estate valuation: telling LPs the truth about your marks

Start with what the market has done. Green Street's Commercial Property Price Index, in its May 2026 release, fell 0.1% in April, is up 3.1% over the past twelve months and stands 16% below its 2022 peak. That headline describes a market that has stopped falling and begun to recover slowly, but not one that has returned to its high.

The averages hide dispersion. The same index shows office values 35% below the 2022 peak, self-storage 22% below, apartments 19% below, net lease 18% below, industrial 12% below and malls 6% below. A fund with a diversified portfolio will therefore hold assets marked off very different starting points, and an LP who sees a single fund-level mark has little way to judge which parts of the portfolio carry the risk.

The Federal Reserve's May 2026 Financial Stability Report adds the official view: aggregate real commercial real estate prices showed further signs of stabilisation after significant declines between mid-2022 and early 2024. Stabilisation is not the same as recovery, and it does not mean that every asset has found its floor.

The implication for Investor Relations is that portfolio-level narratives are not enough. LPs need to see the valuation story by sector and, where material, by asset, with an explicit view of where each sits relative to its peak value and why. A manager who can tell that story precisely is in a stronger position than one who offers a general assurance that the portfolio is resilient.

A further complication is the difference between price and value. A price is what a buyer paid on a given day; a valuation is an estimate of what an asset would fetch in an orderly sale under defined assumptions. In a market where distressed or motivated sellers set some prices, the transaction record may overstate the fall in value for assets held by owners with no need to sell. Managers should acknowledge this distinction openly, since it is the legitimate basis for holding a mark above a headline price index, but it must be argued with asset-specific evidence.

Finally, remember the audience. Many LPs are themselves reporting to boards, investment committees and beneficiaries, and they need to explain your marks upstream. A manager who gives them clear, quotable reasoning makes that job easier and earns goodwill. One who offers only reassurance leaves them exposed.

A second source of confusion is the difference between appraisal-based indices and transaction-based measures. NCREIF's unleveraged Property Index returned 1.14% in the fourth quarter of 2025 and 4.94% over the past four quarters, but its capital return in the quarter was slightly negative at -0.01%. Income carried the return, and price movement was flat on the appraisal basis.

The open-end core fund benchmark tells a similar story. The NFI-ODCE delivered a gross total return of 3.79% in 2025, after -1.43% in 2024, made up of 4.09% income and -0.29% appreciation. A return that is positive and almost entirely income is consistent with valuations that have stopped falling, but it is also consistent with appraisals that adjust slowly.

Appraisals use comparable transactions and market inputs, but they are updated periodically and reflect the judgement of valuers. In a market with few transactions, they tend to lag. Lags are not misconduct. They are a feature of the method, and LPs understand that, but they expect managers to say when they believe the lag is material, not to leave it for investors to discover from other sources.

For a manager, the action is to compare, internally and every quarter, each mark against the best available market evidence: recent trades of comparable assets, broker opinions of value, debt quotes and the cap-rate movement implied by Green Street or similar indices. Where the gap is meaningful, either adjust the mark or document why the asset-specific evidence justifies holding it.

Index choice matters as much as the method. Appraisal-based indices such as the NPI and the ODCE answer one question, how private portfolios are being carried, while transaction-based and market-implied indices such as Green Street's answer another, where marginal buyers would transact. Presenting both side by side, with an explanation of why they differ, is more credible than choosing the more favourable one.

An often-neglected step is to quantify the lag. If the manager's own mark history shows that carrying values consistently trail transaction evidence by two or three quarters, say so, and say what that implies for the direction of the next marks. LPs reward the manager who anticipates the adjustment over the one who is forced into it.

The sector differences in returns are as important as those in price. In the fourth quarter of 2025, NCREIF reported office returns of 0.81%, residential returns of 1.08%, industrial returns of 1.16%, hotel returns of 1.32% and retail returns of 1.60%. Every sector was positive in the quarter, which can obscure that the underlying price paths since the peak have been far apart.

The ordering is also informative. Office, the sector that has fallen furthest from its peak, posted the lowest return in the quarter, while retail posted the highest. Return in a given quarter reflects income and appreciation together, so a sector that has already repriced can show good current returns while a sector still working through its adjustment shows weaker ones.

LPs trying to understand a fund will want to know exposure by sector, the share of the portfolio in each and the valuation movement over twelve months and since peak. Managers should provide this in a consistent table each quarter and explain changes. The office exposure, in particular, will attract questions, and the best answer is a specific one: building quality, lease expiries, tenant credit and capital expenditure requirements.

Where a fund holds office assets, it is good practice to state the basis for each valuation input, whether the underlying lease structure is stable and how much capital must be spent to retain tenants. These are the factors that determine whether an office asset's mark is defensible, and LPs have learned to ask about them.

Hold-period assumptions are another driver of difference between marks. A valuation that assumes a stabilised exit in three years uses different inputs from one that assumes a hold of seven, and LPs may not know which the manager has chosen. State the assumed hold, the exit cap rate relative to the entry cap rate and the growth assumption for rents. Exit cap-rate assumptions that sit below current market levels are the single most common source of challenge from sophisticated investors, and the manager should be ready to defend them or move them.

Currency and geography add another dimension for North American managers with cross-border portfolios or investors. A fund with Canadian, US and international assets reports in one currency to investors, and valuation movements can be amplified or offset by exchange rates. Separate the property valuation effect from the currency effect in reporting, so that LPs can judge the underlying asset performance independently.

Another point for sector narratives: talk about the mechanism, not just the number. Industrial and apartment valuations depend on rent growth and supply, office on tenant demand and capital expenditure, retail on tenant mix and location, hotels on operating performance. A short explanation of what drives each sector's mark helps LPs to judge whether a change is temporary or structural.

Perhaps the most uncomfortable data point for a manager is the secondary market. Jefferies' 2025 Global Secondary Market Review reports that real estate pricing declined to 70 percent of net asset value, against 92 percent for buyout, 91 percent for credit, 78 percent for venture and growth and 87 percent on average across LP portfolios, in a record $240 billion market.

Several cautions apply. Secondary prices reflect the particular portfolios that sellers choose to offer, often with a liquidity motive, and a discount to NAV does not mean that every asset is worth that much less. Buyers also seek a return, and the discount contains a risk premium. Nonetheless, LPs consider secondary pricing as an indicator, and many are now more active sellers or buyers of fund interests.

The practical point is that an LP who has seen a bid at a discount to NAV will wonder whether the NAV is right. A manager who has anticipated that question can respond with evidence: the composition of the portfolio, the basis for key marks, recent realisations at or near carrying value and the independent valuation process. A manager who has not will face the question without preparation.

We recommend tracking realisation evidence systematically. Compare each sale price, over time, with the most recent mark. A record of sales at or above carrying value is the strongest answer to concerns about NAV, and a record of sales below carrying value is a warning that should prompt reconsideration of the remaining portfolio.

There is also a signalling effect. If a manager's own funds are bought in the secondary market at a discount, the manager should understand who is buying and why. Buyers' diligence questions are a free source of insight into how the market sees your portfolio, and they often anticipate questions that primary LPs will ask later. Treat the secondary process as market research.

A last consideration is how to talk about continuation vehicles and other liquidity solutions. Jefferies reports a record $240 billion secondary market in 2025, and managers are increasingly offered such options. Any transaction that sets a price for existing assets creates a mark of its own, and it must be reconciled with the valuations used elsewhere in the fund. Inconsistency between the two will be noticed.

Valuation does not exist independently of debt. Trepp's CMBS delinquency rate rose by 17 basis points to 7.47% in January 2026, with the office rate rising to an all-time high of 12.34%, above the previous high of 11.76% in October 2025, as reported by ConnectCRE. That is a data point from commercial mortgage-backed securities, not from private fund portfolios, but it influences how lenders, valuers and LPs think.

The link to marks is through refinancing. An asset with a loan maturing in a market with high delinquency and tighter lending faces a harder refinancing and possible equity injection. If a valuation does not reflect the cost of that refinancing, or the probability that the sponsor will have to commit new capital, LPs will question whether it is realistic.

A good practice is to present a debt maturity schedule alongside the valuation: loan balances, maturities, interest-rate exposure, covenants and the plan for each. Explain which loans are likely to be extended, refinanced or repaid, and which require additional equity. LPs prefer a clear view of a difficult refinancing to a surprise capital call.

Where a write-down is necessary because of credit stress, say so, and explain the cause. The difference between a write-down caused by a fall in market value and one caused by a financing event is important to investors, since their remedies and expectations are different.

Scenario discipline helps here. Show LPs a base case and a downside in which refinancing costs are higher and exit values are lower than assumed, and state the equity that each scenario would require. Presenting the downside voluntarily, before anyone asks, is among the most persuasive signs of a manager who understands the portfolio and respects the investor.

There is one more link between credit and valuation: the cost of capital for buyers. When lenders are cautious, buyers can pay less, and values adjust. When lending recovers, values can follow. Reporting a view on the debt market, such as the availability of lenders, spreads and loan-to-value limits, helps LPs to understand your assumptions about exit pricing and why you expect values to move in a particular direction.

Equally, be specific about the sponsor's own position. State clearly whether the fund has reserves to support assets that need equity, whether additional capital would come from LPs or from other sources, and what the decision process would be. Ambiguity on this point is a common cause of friction.

The reporting baseline is moving. The Institutional Limited Partners Association has released an updated Reporting Template and a new Performance Template, the first update since 2016, and said they should be implemented beginning in Q1 2026. Many LPs will ask for ILPA-aligned reporting, and managers who can supply it without delay will have an advantage.

At the same time, institutional appetite for the asset class is mixed. The Hodes Weill and Cornell Institutional Real Estate Allocations Monitor found that target allocations to real estate fell to 10.7% in 2025, the first fall in the survey's history, while institutions were under-allocated by 90 basis points, the widest gap since 2021. LPs want to invest more but are more selective.

That combination, with room to invest but higher scrutiny, favours managers with clear and consistent reporting. An under-allocated LP is a potential commitment, but it will allocate to managers it understands and trusts. Valuation transparency is one of the strongest signals of trustworthiness, because it is hard to fake over several quarters.

The action is to map your current reporting to the ILPA templates now, identify gaps and plan the changes with finance and fund administration. Early adoption demonstrates seriousness. Where templates require data that your systems do not capture, such as fund-level performance on specified methodologies, address that before an LP requests it.

Investor relations teams should also review data quality. Quarterly packs are only as credible as the numbers beneath them, and inconsistencies between the investor report, the audited accounts and the data room will undermine trust faster than any single write-down. A reconciliation process that ties the three together, owned by a named person, is basic hygiene.

Finally, consider the conversation at the annual meeting. LPs increasingly use it to test governance, valuation policy and conflicts. Preparing senior management to answer direct questions about marks, realisations and the pipeline, and sharing the answers in writing afterwards, reinforces consistency. The best IR teams treat the meeting as a part of the continuous reporting cycle, not a once-a-year event.

Bringing these threads together, we suggest a discipline of valuation communication built on five commitments. Publish the valuation policy: who values, how often, using which methods and with what independent review. Explain the movement each quarter: a bridge from the prior mark showing the contribution of cap rates, income, capital expenditure and other factors. Share sensitivities, so LPs can see what a 25 basis point move in cap rates would do.

Third, compare marks with market evidence openly. Where your mark is above indices or secondary pricing, say why. Fourth, set a write-down protocol: the triggers that require a review, the escalation path, and the timing of communication, so that bad news is delivered promptly and in a consistent format. Fifth, brief LPs before material changes, ideally by phone, and follow up in writing.

On tone, avoid euphemism. Terms such as 'rebalancing' for a write-down or 'temporary dislocation' for a persistent repricing are read as evasion. Plain language, such as 'we have reduced the valuation of this asset by this amount because the cap rate we use has risen', builds trust. Equally, avoid exaggerated pessimism. Present facts and judgements, and show where they differ.

This is not only about the present quarter. LPs remember how a manager behaved when marks were falling, and that memory shapes decisions on re-ups and new funds. Candour on marks earns the right to raise the next fund, and the managers who internalise that will find their cost of capital lower in the next cycle. This briefing is general information, not investment or legal advice; securities-law and marketing requirements should be reviewed with counsel and regulated advisers.

It is worth sequencing the fundraising implications. Twelve to eighteen months before a launch, begin reporting to the standard you will want to be known for. Present a multi-quarter record of valuations, realisations and explanations. Prospective LPs will ask for the track record of marks against exits, and a manager who can show that exit prices have been close to carrying values has a powerful argument. A manager whose exits were repeatedly below marks has to explain why.

Be prepared, too, for the diligence questions of investment advisers and gatekeepers. They will ask about valuation governance, the independence of valuers, conflicts of interest in fee calculations and the history of marks. Answers that are documented, consistent with prior reports and free of defensive language are what they are looking for. Preparing them in advance saves time and signals professionalism.

None of this requires pessimism about the market. Values appear to be stabilising, as the Federal Reserve's assessment indicates, and the allocation data show LPs wanting to invest. The managers best placed to benefit are those whose reporting makes it easy for LPs to say yes.

Karter McKinley supports capital-raising processes for real estate managers: investor materials, valuation and performance narratives, LP communication plans and fundraising preparation, working alongside regulated advisers and counsel where regulated activity is involved. We do not provide investment, valuation or legal advice.