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Economy in Brief

MIT Center for Real Estate Compiles Price and Total Return Indexes for Commercial Real Estate Transactions: Properties Earn 34% in 2005
by Carol Stone April 5, 2006

Commercial real estate has increased significantly in importance as an investment medium in recent years. Securitization of commercial mortgage securities and direct interests in portfolios of properties join residential real estate as outlets for capital. But it is complicated to assess the returns on such investments. Each property is sizable and very different from every other property. So, unlike other objects to be priced, there are not simple rules-of-thumb or statistical properties that can be exploited to derive valuations.

Just in mid-February, the Massachusetts Institute of Technology's Center for Real Estate introduced a helpful tool in this process, the Transactions-Based Index. A client brought these new quarterly series to Haver's attention, and they were added to our basic USECON product about two weeks ago.

The Total Return Index shows that commercial real estate holdings earned 34.3% in 2005, following valuation gains of 16.0% in 2004 and 10.0% in 2003. Returns based on price change alone were 29.4% last year, 10.7% in 2004 and 4.2% in 2003.

These figures are weighted indexes for "All Properties", including apartments, industrial buildings, offices and retail centers. Sub-indexes are available for each one of these segments. Retail properties were the strongest in 2005, with a 40.2% total return, while industrial buildings earned "only" 24.2%.

The secret to these indexes is a proprietary database maintained by the National Council of Real Estate Investment Fiduciaries (NCREIF). This group is a trade association of pension funds managers; they collectively own some $200 billion worth of commercial properties numbering about 5,000. Data on pricing and income is taken from actual transactions involving these properties.

Further, since the properties are all distinct, the "average" value of transactions cannot by obtained by simply toting up individual prices and dividing by some appropriate number. The indexes are compiled by appeal to the same kind of weighted "hedonic", quality-adjusting econometric techniques used by BEA and BLS for constructing many of the price indexes used by economists every day. The NCREIF database has been maintained for many years, allowing the MIT econometricians to construct 22 years of history for the "All Property" index and 12 years for the individual property types. A press release and more detailed description of the data are found here on the website of the MIT Center for Real Estate.

MIT Commercial Real Estate "TBI" Indexes Q4 2005 Q3 2005 Q2 2005
2004 2003 2002
Total Return Index 668.0 638.9 601.1 497.1 428.5 389.5
Yr/Yr % Change 34.3 31.8 26.0 16.0 10.0 11.5
TBI Price Index 194.3 187.3 177.7 150.2 135.7 130.2
Yr/Yr % Change 29.4 26.6 20.6 10.7 4.2 4.3
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