Focus on U.S. Real Estate Benchmarks: NCREIF Transaction Based Index

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By Brad Case, PhD, CFA, CAIA

This is the third in a series of articles focusing on the strengths of different indices that are published regularly and may be appropriate for benchmarking, risk assessment, and other real estate investment purposes.

  • The first article focused on two similar index families, the Moody’s/RCA Commercial Property Price Index (CPPI) and the CoStar Commercial Repeat-Sales Index (CCRSI), both of which measure monthly capital appreciation at the property level.
  • The second article focused on the NCREIF Property Index (NPI), which measures quarterly capital appreciation, income, and total return at the property level.
  • In this article I will focus on the NCREIF Transaction Based Index (NTBI) also published by the National Council of Real Estate Investment Fiduciaries.

The NTBI measures average average gross total return and average gross price return at the property level. It is published quarterly based on the subset of transacting properties from reports submitted by NCREIF data contributing members for more than 7,000 properties worth nearly $400 billion owned at least in part by tax-exempt institutional investors such as pension funds. During most quarters since the beginning of 1997 the NTBI has been based on between 80 and 143 transactions. It is available for the aggregate U.S. commercial property market as well as for several important market segments.

What It Measures:

  • As with the CPPI, CCRSI, and NPI, the NTBI measures returns at the property level, meaning that it does not measure the effects of leverage, which increases returns (provided that returns are greater than the cost of debt) and also increases volatility and other forms of risk. For properties purchased with debt, or held by investment managers who use debt, the NTBI measures returns on the asset rather than on the equity invested. The relationship between returns on the asset and returns on the equity invested is: %RoA = [%RoE + %WACD * %L/(1-%L)] / [1 + %L/(1-%L)] where %WACD is the weighted average cost of debt and %L is leverage measured as debt divided by asset value.
  • As with the NPI, the NTBI measures returns for operating properties, defined as existing properties that are not undergoing redevelopment, plus newly developed and redeveloped properties that have achieved occupancy of at least 60%. Properties that were not part of the NPI data base for at least two quarters prior to transaction, and properties that appear to have undergone significant change just prior to transaction, are excluded.
  • Along with total return, the NTBI also provides an index of price return. Users should note that the price change measured by the NTBI is not the same as the capital appreciation measured by the NPI.
  • The nationwide all-property index is available back to 1984Q1, meaning that the first available quarterly return is for 1984Q2.

Reporting Schedule and Access: The NTBI is published roughly one month following the end of each quarter. It is available free to NCREIF data contributing members, while others who cannot qualify as data contributing members can purchase access to the data (

Geography: In addition to the nationwide index the NTBI is also published for the four NCREIF regions: East, Midwest, South, and West. The regional indices are available back to 1993Q4, meaning that the first available quarterly returns are for 1994Q1.

Property Types: In addition to the all-property indices the NPI is published for four property types: Apartment, Industrial, Office, and Retail. Users should note that hotel properties are included in the NPI but not in the NTBI. As for the regional indices, the property type indices are available back to 1993Q4.

Geography/Type Combinations: No combinations of geography and property type are available for the NTBI owing to the small number of transactions.

Weighting: The NTBI is published in both equal-weighted and value-weighted versions.

Methodology: The NTBI is a simplified version of the TBI originally published by the MIT Center for Real Estate; both versions were developed by David Geltner, the MIT professor who also developed the methodology for the CPPI. Descriptions of the NTBI methodology are available here and especially here. Briefly, the NTBI “is calculated by taking the average ratio of current sale price divided by a two quarter lagged appraisal (from the NPI database) among all the sold properties each quarter. That ratio is multiplied times the NPI cumulative capital appreciation index level, to convert the result into a transaction price index.” In other words, the NTBI methodology seeks to correct for average appraisal error, which tends to change systematically from quarter to quarter.

Advantages: The great advantage of the NTBI is that it makes it possible to measure more accurately both the volatility of commercial property investments (and therefore their risk-adjusted returns) and the correlations between commercial property returns and the returns on other assets. I highlighted the importance of this in my article on whether private real estate is actually less volatile than public real estate. (Spoiler alert: it’s not.)

Disadvantages: The great disadvantages of the NTBI stem from the illiquidity of the property market:

  • Small number of transactions: in fact, the NTBI couldn’t even be computed in 2009Q1 because of a scarcity of transactions as liquidity dried up.
  • Data scarcity has also produced several quarterly anomalies: for example, the price return computed for 2005Q2 was a shocking +16.79%, sandwiched among several calm quarters (-0.24% in 2004Q4, +0.24% in 2005Q1, +0.59% in 2005Q3, and +2.18% in 2005Q4).
  • Infrequency: because the number of transactions within the NPI data base is so small, the NTBI cannot be computed at the same monthly frequency as the CPPI and CCRSI.
  • Illiquidity lag: because it takes so much time to complete a property transaction, movements reported by the NTBI still lag behind actual movements in market values by about two quarters. (This is, of course, much better than the appraisal-based NPI, which lags by about 4-5 quarters.)
  • Illiquidity smoothing: because transactions have to be collected over an entire quarter to give enough data to compute the index, the NTBI still under-reports the volatility of commercial property returns, thereby over-stating risk-adjusted returns. (Again, this is much better than the appraisal-based NPI, which is worse than worthless for estimating commercial real estate volatility and correlations.)

Notwithstanding these disadvantages, the NTBI can be very valuable for developing a better understanding of the investment return characteristics of commercial real estate, especially for understanding volatility and correlations.

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.

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