A Quarterly Transactions-Based Index of Institutional Real Estate Investment Performance and Movements in Supply and Demand

Abstract

This article presents a methodology for producing a quarterly transactions-based index (TBI) of property-level investment performance for U.S. institutional real estate. Indices are presented for investment periodic total returns and capital appreciation (or price-changes) for the major property types included in the NCREIF Property Index. These indices are based on transaction prices to avoid appraisal-based sources of index smoothing and lagging bias. In addition to producing variable-liquidity indices, this approach employs the Fisher-Gatzlaff-Geltner-Haurin (REE 2003) methodology to produce separate indices tracking movements on the demand and supply sides of the investment market, including a constant-liquidity (demand side) index. Extensions of Bayesian noise filtering techniques developed by Gatzlaff & Geltner (REF 1998) and Geltner & Goetzmann (JREFE 2000) are employed to allow development of quarterly frequency, market segment specific indices. The hedonic price model used in the indices is based on an extension of the Clapp & Giacotto (JASA 1992) assessed value method, using a NCREIF-reported recent appraised value of each transacting property as the composite hedonic variable, thus allowing time-dummy coefficients to represent the difference each period between the (lagged) appraisals and the transaction prices. The index could also be used to produce a mass appraisal of the NCREIF property database each quarter, a byproduct of which would be the ability to provide transactions price based atuomated valuation model estimates of property value for each NCREIF property each quarter.