By Brad Case, Ph.D., CFA, CAIA
A variety of indices are published regularly and may be appropriate for benchmarking, risk assessment, and other real estate investment purposes. I plan to focus on the strengths of each index series, starting with two that share similar approaches: the Moody’s/RCA Commercial Property Price Index (CPPI) and the CoStar Commercial Repeat-Sales Index (CCRSI). Both are published monthly based on actual property transactions; both measure average price appreciation at the property level; and both are available for the aggregate U.S. commercial property market as well as for important market segments.
The CPPI is published jointly by Moody’s Investors Service and Real Capital Analytics (RCA), which tracks all transactions of properties valued at more than $2.5 million, while the CCRSI published by CoStar is based on an even broader set of properties. Both index series are based on a version of the repeat-transactions methodology popularized by Case and Shiller: basically, two transactions of the same property show how much the value of that property changed during the time between the two transaction dates, and “averaging” the changes across a large number of transaction-pairs (with a variety of first-sale dates and second-sale dates) enables us to estimate how much of the change in overall property values happened during each month. The CPPI is based on a methodology originally described in a paper available here, while the CCRSI methodology is detailed here.
What They Measure: The CPPI and CCRSI measure the implied monthly change in market value for a property that has had “normal” levels of both economic depreciation and capital reinvestment. They do not measure income or total returns at the property level, nor do they measure returns to investors on property investments in which any debt is used.
- The publicly accessible CPPI is available for the entire U.S. and separately for “major markets” (Boston, Chicago, Los Angeles, New York, San Francisco, and Washington D.C.) and “non-major markets” (all others). In addition, office property indexes are available for the entire U.S. and separately for central business district (CBD) and suburban areas.
- Real Capital Analytics separately publishes indices for five regions (Northeast/Mid-Atlantic, Midwest, Southeast, Southwest, and West), 20 states, and 34 metro areas. The RCA CPPI index series, which is available only to subscribers, is described here.
- The publicly accessible CCRSI is available for the entire U.S.; separately by region (Midwest, Northeast, South, and West); and separately for “prime market” and “non-prime markets” for the multi-family, office, retail, and industrial property types. (Prime markets are defined in each CCRSI release.)
- The publicly accessible CPPI is available for Apartment, Industrial, Office, and Retail property types, as well as a “core commercial” aggregate of industrial, office, and retail properties. The Hotel property type is available to subscribers through the separate RCA CPPI index series.
- The publicly accessible CCRSI is available for Hospitality, Industrial, Land, Multifamily, Office, and Retail property types, as well as a “composite excluding multifamily” aggregate.
- The publicly accessible CCRSI is available for 16 combinations of region (Midwest, Northeast, South, and West) with property type (Industrial, Multifamily, Office, and Retail).
- The publicly accessible CPPI is available on request for 10 “building block” combinations of market category (“major” or “non-major”) with property type (Apartment, Industrial, CBD Office, Suburban Office, Retail), while the subscription-based RCA CPPI index series includes multiple additional combinations.
- All properties are weighted equally in computing the 10 “building block” indices for the CPPI; the national aggregate index, as well as the region and property type indices, are then constructed from the “building block” indices using dollar value of transaction volumes as weights.
- Both value-weighted and equal-weighted versions of the CCRSI are available, except for the Hospitality and Land property types which are available only in equal-weighted versions.
Advantages: Both the CPPI and the CCRSI are published monthly rather than quarterly, and both are based on actual transaction prices rather than appraisals. This means that both indices produce substantially more accurate measurements of movements in property values over time compared to appraisal-based indices, whether at the property level (such as the NCREIF Property Index) or at the fund level (such as the NCREIF ODCE Index, the PREA|IPD U.S. Quarterly Property Fund Index, or the Cambridge Associates Real Estate Index). In addition, both cover substantially the entire commercial property market in the U.S.
- Both the CPPI and the CCRSI are significantly delayed relative to actual movements in property values, with both published at least six weeks following the end of the month being measured.
- Both the CPPI and the CCRSI use only property transactions that have already been completed. Because it takes a long time to complete a transaction even after the buyer and seller have agreed on the transaction price, both indices suffer from illiquidity lag, which means that movements in property values tend to be measured roughly six months (on average) after they actually occurred.
- Because of the small number of properties that transact in any given month—and the even smaller number of transacting properties for which RCA and CoStar also have data on a previous transaction—both the CPPI and the CCRSI are based on relatively small data sets and neither measures movements for any period less than a month.
- Because transactions completed at any time during a given month must aggregated together to have enough data to compute the indices, both the CPPI and the CCRSI suffer from illiquidity smoothing (also called “aggregation bias”), which makes property values appear less volatile than they truly are.
- Repeat-transacting properties may not be representative of properties that did not transact, or that transacted less frequently, so both indices may be biased although the direction of the bias is not clear.
- Both the CPPI and the CCRSI cover substantially the entire commercial property market in the U.S., but many institutional investors own portfolios that are concentrated in the higher-quality and more-expensive segments of the market; therefore, neither may be appropriate for benchmarking a higher-quality real estate portfolio.
Notwithstanding these disadvantages, both the CPPI and the CCRSI can be very valuable for benchmarking, risk assessment, and other investment purposes.
Brad Case is senior vice president, research & industry information for the National Association of Real Estate Investment Trusts (NAREIT). Dr. Case has researched residential and commercial real estate markets, domestically and globally, for more than 25 years. His research encompasses investment return characteristics including returns, volatilities, and correlations with other assets; measuring appreciation in property values; inflation protection; use of DCC-GARCH and Markov regime switching models to measure and predict investment characteristics; the length of the real estate market cycle; and the role of the investment horizon. He holds patents as the co-inventor of the FTSE NAREIT PureProperty(r) index methodology and the backward-forward trading contract. Dr. Case earned his Ph.D. in Economics at Yale University, where he worked with Robert Shiller and William Goetzmann, and holds the Certified Alternative Investment Analyst (CAIA) designation.