How Accurate Are Commercial Real Estate Appraisals? Evidence from 25 Years of NCREIF Sales Data

Susanne, Cannon and Rebel, Cole (2011): How Accurate Are Commercial Real Estate Appraisals? Evidence from 25 Years of NCREIF Sales Data. Published in: Journal of Portfolio Management , Vol. 35, No. 5 (31 August 2011): pp. 68-88.

Abstract

In this study, we provide new evidence on the performance measurement and reporting of commercial real estate returns. We do so by examining the accuracy of commercial-real-estate appraisals that occurred prior to the sale of properties from the NCREIF National Property Index (“NPI”) during 1984 – 2010, a period which spans two up-and-down cycles of the market. We find that, on average, appraisals are more than 12% above, or below, subsequent sales prices that take place two quarters following the appraisal. Even in a portfolio context, allowing for offsetting positive and negative differences, appraisals are off by an average of 4% – 5 % of value, even after adjusting for capital appreciation during those two quarters. We also provide new evidence regarding how, and by how much, appraised values lag behind sales prices. We find that appraisals appear to lag the true sales prices, falling significantly below in hot markets and remaining significantly above in cold markets. This new evidence provides guidance to investors, regulators and others about how to interpret real-estate indices like the NPI that are based upon appraised values, in both a rising and falling market. Finally, we find that this “appraisal error” is largely systematic; we can explain more than half of the variation in the signed percentage difference in sales price and appraised value. Hence, appraisal errors are not due solely to property-specific heterogeneity.

• Item Type: MPRA Paper
• Language: English
• Keywords: appraisal; commercial real estate; NCREIF; NPI; property index
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location > R33 - Nonagricultural and Nonresidential Real Estate Markets

References

Cole, Rebel, David Guilkey and Mike Miles. 1986. Toward an Assessment of the Reliability of Commercial Appraisals. The Appraisal Journal, July, 442 – 432.

Fisher, Jeffery D., Dean Gatzlaff, David Geltner and Donald Haurin. 2004. An Analysis of the Determinants of Transaction Frequency of Institutional Commercial Real Estate Investment Property. Real Estate Economics 32 (2), 239 – 264.

Fisher, Jeffery D., Mike E. Miles and R. Brian Webb. 1999. How Reliable Are Commercial Appraisals? Another Look. Real Estate Finance, Fall, 9 – 15.

Hoag, James W. 1980. Towards Indices of Real Estate Value and Return. The Journal of Finance 35, 569 – 580.

Miles, Mike, Rebel Cole and David Guilkey. 1990. A Different Look at Commercial Real Estate Returns. AREUEA Journal 18, 403 – 430.

Miles, Mike, David Guilkey, Brian Webb and Kevin Hunter. 1991. An Empirical Evaluation of the Reliability of Commercial Appraisals, 1978 – 1990. NCREIF Working Paper.

Webb, R. Brian. 1994. On the Reliability of Commercial Appraisals: An Analysis of Properties Sold from the Russell-NCREIF Index (1978 – 1992), Real Estate Finance 11 (1), 62 – 65.

Webb, R. Brian, Mike E. Miles, and David K. Guilkey. 1992. Transactions-Driven Commercial Real Estate Returns: The Panacea to Asset Allocation Models? AREUEA Journal 20(2), 325 – 357.