VALUE INDEXES OF COMMERCIAL REAL-ESTATE - A COMPARISON OF INDEX CONSTRUCTION METHODS

The purpose of this paper is to shed light on the history of commercial property values over the past decade, and to compare different methods of constructing commercial property value indices and returns series. We examine three types of indices: (i) Indices that attempt to reconstruct property market values by ''unsmoothing'' the appraisal-based Russell-NCREIF Index; (ii) Indices that trace average ex post transaction prices of commercial property over time; and (iii) an index based on unlevering REIT share prices. By comparing the different historical pictures that result from the various index construction methodologies, one gains insight into the nature of commercial property price and valuation behavior. The REIT-based values lead the other indices in time but display greater short-run volatility. The transactions-based indices lag behind the other series in time, and are consistent with the idea that institutional investors attempt to hold onto properties until they can sell them for a price at least equal to the current appraised value, in effect trading off liquidity for reduced volatility.