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

45 Pages Posted: 27 Apr 2011 Last revised: 11 Jan 2013

See all articles by Susanne E. Cannon

Susanne E. Cannon

DePaul University Department of Real Estate

Rebel A. Cole

Florida Atlantic University

Date Written: May 20, 2011

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.

Keywords: appraisal, appraisal lag, commercial real estate, commingled real estate fund, real estate cycle, separate account, NCREIF, NPI

JEL Classification: G11, G22, G23, L85, R33, R51

Suggested Citation

Cannon, Susanne E. and Cole, Rebel A., How Accurate are Commercial Real Estate Appraisals? Evidence from 25 Years of NCREIF Sales Data (May 20, 2011). Journalof Portfolio Management, Vol. 35, No. 5, 2011. Available at SSRN: https://ssrn.com/abstract=1824807 or http://dx.doi.org/10.2139/ssrn.1824807

Susanne E. Cannon

DePaul University Department of Real Estate ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

Rebel A. Cole (Contact Author)

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

Register to save articles to
your library

Register

Paper statistics

Downloads
280
Abstract Views
1,583
rank
106,686
PlumX Metrics