Estimating Transaction-Based Price Indices of Local Commercial Real Estate Markets

Abstract

This study examines the feasibility of constructing reliable commercial property price indices using property tax records. We employ the Clapp and Giacotto (1992) assessed-value method to estimate price indices from 1988:4 to 2008:4 for commercial properties in Florida. The estimated Florida commercial property price index is compared to the Moody’s/REAL Commercial Property Price Index (CPPI) and to the transaction-based index (TBI) produced by the Commercial Real Estate Data Lab at MIT. Our results are promising, suggesting that this widely-available data source can be used to produce commercial price indices for a wide variety of precise market locations and specific investor segments on an ongoing basis.

We use our comprehensive database to examine two specific subsets in more detail. First, we narrow our range to focus on just the office sector for Florida. We compare price movements for the Florida office sector with the comparable CPPI. Estimates produce very similar price movements providing support to both methods. Second, we contrast the price performance of higher- and lower-valued properties. Chow tests indicate that Florida commercial properties assessed at $2.5 million, or above, appreciated on average at greater rates than those assessed below $2.5 million. In addition, our estimates indicate that highervalued properties performed especially well during periods of economic expansion. This finding represents an important contribution toward understanding the relative performance of smaller and institutional-grade commercial properties.

Keywords: Real Estate Indices, Real Estate Investment

JEL Classification: E3, G19