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How accurate are commercial-real-estate appraisals? evidence from 25 years of NCREIF sales data

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  • Cannon, Susanne
  • Col, Rebel A.
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    Abstract

    In this study, we provide new evidence on the performance measurement and reporting of commercial real estate returns. We do so by examining the accuracy of commercial-real-estate appraisals that occurred prior to the sale of properties from the NCREIF National Property Index (“NPI”) during 1984 – 2010, a period which spans two up-and-down cycles of the market. We find that, on average, appraisals are more than 12% above, or below, subsequent sales prices that take place two quarters following the appraisal. Even in a portfolio context, allowing for offsetting positive and negative differences, appraisals are off by an average of 4% – 5 % of value, even after adjusting for capital appreciation during those two quarters. We also provide new evidence regarding how, and by how much, appraised values lag behind sales prices. We find that appraisals appear to lag the true sales prices, falling significantly below in hot markets and remaining significantly above in cold markets. This new evidence provides guidance to investors, regulators and others about how to interpret real-estate indices like the NPI that are based upon appraised values, in both a rising and falling market. Finally, we find that this “appraisal error” is largely systematic; we can explain more than half of the variation in the signed percentage difference in sales price and appraised value. Hence, appraisal errors are not due solely to property-specific heterogeneity.

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    File URL: http://mpra.ub.uni-muenchen.de/32589/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32589.

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    Date of creation: 25 May 2011
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    Handle: RePEc:pra:mprapa:32589

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    Keywords: appraisal; commercial real estate; commingled real estate fund; NCREIF; real estate;

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    1. Jeffrey Fisher & Dean Gatzlaff & David Geltner & Donald Haurin, 2004. "An Analysis of the Determinants of Transaction Frequency of Institutional Commercial Real Estate Investment Property," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(2), pages 239-264, 06.
    2. R. Brian Webb & Mike Miles & David Guilkey, 1992. "Transactions-Driven Commercial Real Estate Returns: The Panacea to Asset Allocation Models?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(2), pages 325-357.
    3. Mike Miles & Rebel Cole & David Guilkey, 1990. "A Different Look at Commercial Real Estate Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 403-430.
    4. Hoag, James W, 1980. " Towards Indices of Real Estate Value and Return," Journal of Finance, American Finance Association, vol. 35(2), pages 569-80, May.
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