MIT and Real Capital Analytics Announce Pioneering Tradable Commercial Property Index
December 20, 2006
The MIT Center for Real Estate and Real Capital Analytics, Inc. are launching a set of pioneering indexes for tracking commercial investment property prices in the United States, the center director and RCA president said in a joint announcement today.
The MIT Center for Real Estate (MIT/CRE) developed the new suite of 29 indexes to support derivatives trading such as index return swaps. The indexes are based on comprehensive data on commercial property transactions prices from the New York-based RCA.
In making the announcement, MIT/CRE director David Geltner said, "The development of an active futures market, which does not currently exist for commercial property, would greatly increase the efficiency of the real estate industry. It will address such long-standing problems with real estate investment as high transactions costs, lack of liquidity, inability to sell 'short' and difficulty comparing investment returns with securities such as stocks and bonds."
"This index is a major step in the evolution of commercial real estate as an accepted asset class by providing benchmarking and hedging capabilities never before available," said RCA president Robert M. White Jr. "We have further developed our database to meet MIT index development needs," he added.
According to Geltner and White, a consortium of firms is currently developing plans to enable trading of futures derivatives on the family of indexes as soon as the first quarter of 2007. Even before that, the new indexes will be published on the web sites of MIT/CRE and RCA and will be available free of charge as an information service to the academic and industry research communities.
Henry Pollakowski, co-director of the MIT/CRE's Commercial Real Estate Data Laboratory, said the new indexes achieve a number of firsts. "We have developed the first true monthly national index that does not involve a moving average across past months; the first 'primary markets' (top 10 metropolitan areas) quarterly indexes for each of the four major property types — office, apartment, industrial, retail; and the suite of 29 basic indexes includes the first annual indexes for specific property types in specific metropolitan areas, such as office buildings in New York."
Pollakowski also noted that the new MIT/CRE indexes are the "first regularly produced commercial property indexes based on repeat sales of individual properties, of the same basic index construction method as the Case-Shiller/S&P housing indexes that underlie the new Chicago Mercantile Exchange housing futures contracts. Such econometrically rigorous index construction methods are necessary to track the same-property price changes that are of the type actually faced by property investors."
In addition, the suite of 29 indexes includes quarterly indexes for the four property types at the national level and annual regional indexes for each of the property types.
The RCA database that makes the index possible is one of the nation’s most extensively and intensively documented databases of commercial property prices, including on a timely basis the vast majority of commercial property sales of more than $2.5 million. The MIT Center for Real Estate developed the methodology for producing the indexes from the sales data.
The End of the Commercial Real Estate Boom: Early Evidence
The latest index results provide solid evidence of the magnitude of the 2003—2005 commercial investment property bull market in the United States and indicate that for the broad market the "boom" period ended early this year. From a bottom in February 2002 to a plateau in February 2006, the national aggregate index rose 66 percent. Since then, the flagship monthly index has shown no cumulative gain, the longest period of no net gain since the 2001—2002 recession. The bull market was truly impressive, with no negative month from August 2003 through September 2005.
The quarterly property sector indexes show broad similarity but also present interesting specific differences. The fastest growing sector from the second quarter of 2002 through the third quarter of 2005 was apartments, which produced a 75 percent price appreciation during that period, driven in many markets by a condo-conversion boom that ended in 2005. But the apartment sector peaked first and since the third quarter of 2005 has declined 5 percent. The preliminary index returns for the third quarter of 2006 show both the office and industrial sectors declining for the first time. Office declined more than 2 percent, while retail continued to increase (2 percent).
About the Project Development Team
The indexes were developed by MIT/CRE in conjunction with RCA and with input from an advisory team that included Professor Jeff Fisher of Indiana University, Brad McGill, and Pierre Wolf.
The MIT Center for Real Estate is an interdepartmental research and educational unit within MIT’s School of Architecture and Planning that administers MIT’s master of science in real estate development program and provides a link between MIT and the real estate industry.
Real Capital Analytics, Inc. is a pioneer in the compilation, analysis and dissemination of commercial property transaction and capital flow data. RCA’s clients include major brokerage firms, commercial lenders, investment managers and investment institutions.
For more information about the new indexes, contact:
Director, Center for Real Estate
Henry Pollakowski, Co-Director of the MIT/CRE Commercial Real Estate Data Laboratory
Patti Richards, Senior Communications Officer, MIT News Office, 617-253-8923