Commercial Real Estate Data Laboratory (CREDL)
MIT/CRE’s Pioneering Role in New Commercial Property Performance Indices
Since 2005, Prof. David Geltner has played a lead role, jointly with industry partners, in the historical development of three new types of indices for tracking the pricing and investment performance of commercial properties. These R&D projects pioneered the development of practical, industry commercializable methodology for basing such indices on property sales transaction prices and on REIT-based stock market valuations. The resulting improvement in information available for industry and academia holds the potential to be a transformational historical development for the commercial property investment industry. The three projects include:
TBI (Transaction Based Index) with NCREIF, 2005-2006
Resulting commercial product: NTBI, published by NCREIF (from 2011)
CPPI (Commercial Property Price Index) with RCA (and REAL), 2006-2008
Resulting commercial products:
- Moody’s/REAL CPPI (2007-2011)
- Moody’s/RCA CPPI (from 2012)
- RCA CPPI (from 2013)
PureProperty® (REIT-Based Property Price Indices) with NAREIT, 2008-2010
Resulting commercial product: FTSE-NAREIT PureProperty™ Indices (from 2012)
MIT/CRE Original Development of TBI
Traditionally the only types of commercial property price or investment performance index regularly produced and published were based on appraised values. The idea of transaction price indices is to base the estimate of price change more directly and purely on the fundamental empirical evidence about the market value of properties, their transaction prices. The challenge is controlling for differences between the properties that transact from one period to the next. Sufficient databases of commercial property transactions prices were not developed until the 1990s. In the real estate price index econometric literature there are two major approaches to producing rigorous transaction based indices. One approach is called hedonic modeling, and the other is repeat-sales regression. The TBI project essentially used the hedonic approach, based on the properties sold from the NCREIF Index database, regressing their transaction prices onto their recent appraised values and time-dummy variables. The index was produced by combining the NCREIF appraisal-based index with the regression time-dummy coefficients reflecting the differences between appraisals and transaction prices. The TBI was launched by the MIT/CRE in February 2006 and published quarterly until 2011, when NCREIF took over production and publication (with slightly modified methodology), now referred to as the NTBI.
- Original academic paper describing the original TBI methodology.
- White paper describing the transition to NCREIF production and the NTBI.
- Latest data for Q3 2014 TBI Index and Commentary published by the MIT/CRE on the demand (constant-liquidity) and supply reservation price indices.
MIT/CRE Historical Development of CPPI
The MIT/CRE is proud of the role it played historically in the development of the first regularly published repeat-sales index of commercial property, the Moody’s/REAL Commercial Property Price Index (CPPI). This pioneering index was an outgrowth of the MIT/CRE’s Industry Partnership Program, and was supported by Industry Partner firm Real Capital Analytics LLC (RCA). In 2006 RCA affiliate Real Estate Analytics LLC (REAL) sponsored the original development of the CPPI methodology at the MIT/CRE. The index was launched in December, 2006 on the MIT/CRE website, and was published monthly thereafter. In 2007 production and branding was taken over by Moody’s Investors Service, and the index was branded as the Moody’s/REAL CPPI. The project was spun out from MIT to the private sector by 2008. In 2011 production and publication of the original CPPI ceased, but a second generation monthly index suite was launched by Moody’s and RCA in May 2012 as the Moody’s/RCA CPPI, building on the original methodology. A copy of the technical white paper accompanying the original launch of the CPPI is available here. The CPPI was the second pioneering transaction price based commercial property performance index developed at the Center, after the NCREIF-based TBI.
MIT/CRE Proof of Concept Project for Stock Market Based Property Indices
In 2008 MIT/CRE industry partner NAREIT (the National Association of REITs) sponsored a research project at the Center to demonstrate the proof of concept for a new type of index to track the pricing and investment performance of commercial properties held by REITs traded publicly in the stock market. REITs are essentially pure plays in commercial property investment. The stock market is an extremely efficient and effective aggregator of information about the value of traded stocks. The basic idea of a stock market based index of property-level pricing and investment performance is to: (1) De-lever the individual REIT stock returns, and (2) Perform a cross-sectional regression of the de-levered REIT returns onto the holdings percentages of each REIT’s assets in each of various property market segments of interest.
The regression yields pure play portfolios with specified long and short positions in the REITs that eliminate all exposure to non-target property segments and provide pure exposure to the target property segment, with minimum idiosyncratic volatility. The result is indices of specific property sectors (such as office, apartment, etc) and geographic regions (such as East, West, etc) and combinations (such as East Region Office, etc). In 2010 the resulting methodology was licensed by MIT to NAREIT, and NAREIT joined with commercial index producer FTSE to develop the commercial product, the FTSE-NAREIT PureProperty™ Index series, which was launched by FTSE in 2012.
- Click here for an academic paper describing the basic methodology and the original project.