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

"The purpose of this paper is to describe and hone a methodology by which a quarterly transactions-based index of property-level investment performance could be regularly produced for the U.S. institutional real estate investment industry. The objective is to produce a series of indices of investment periodic total returns and capital appreciation (or price-changes) for the major property type and geographic market segments included in the NCREIF Property Index. The index is based on transaction prices so as to avoid appraisal-based sources of index ""smoothing"" and lagging bias. In addition to producing variable-liquidity indices, the approach developed in this paper 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 ""constant-liquidity"" (demand side) indices. 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 basic hedonic price model is based on an extension of the Clapp & Giacotto (JASA 1992) ""assessed value method"", using a NCREIF-reported recent appraised value of each 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 is used to produce a mass appraisal of the NCREIF property database each quarter, a byproduct of which will be the ability to provide ""automated valuation model"" estimates of property value (either variable liquidity or constant liquidity) for each NCREIF property each quarter. "