PLAN 64: Article
Revealing The Investment Value Of Commercial Real Estate

New Performance Index Provides Information Never Before Made Available

MIT’s Center for Real Estate has developed an investment performance index that uses modern econometrics to track the value of commercial real estate, providing investment researchers with more comprehensive and accurate information than has ever before been made available. The index covers the period 1984-2005 and will be updated quarterly.

Even though real estate has joined stocks and bonds as a major investment vehicle over the past 30 years — it is especially favored by big pension funds — keeping current on investment performance in this sector has been difficult. While the performance of stocks and bonds can be tracked daily because they are publicly traded, commercial real estate indices have been based on median sales price or appraisals, and haven’t accurately reflected actual investment performance.

The new transaction-based index uses sophisticated statistical techniques and proprietary transactions data to create a more accurate and representative index based on actual commercial real estate transactions. The Center for Real Estate works with the National Council of Real Estate Investment Fiduciaries (NCREIF) – a not-for-profit organization made up of firms that invest pension money – to gather data on commercial transactions and generate the index each quarter. This index is the first of its kind for commercial real estate.

The first results, released in February, showed an unexpectedly large 34% return on investment in commercial real estate during 2005. (As a comparison, the return on the S&P 500 index during 2005 was 4.9%.) Investment returns were also measured for four major commercial property types – office, retail, apartment and industrial.

The Transactions-Based Index was created by the Commercial Real Estate Data Laboratory at the Center for Real Estate. The Lab’s purpose is to gather data, measure the performance of commercial real estate, and develop practical tools to help govern business and policy decisions. It also provides a public space for analysis and perspective on issues of commercial real estate, bringing together academic research and industry practices in collaboration.

The Laboratory plans to update the new index each quarter and release the results to the public. Additional transactions-based indices are also being developed for public release.


June 2006