CAMBRIDGE, Mass. -- Transaction prices of commercial properties sold by major institutional investors were nearly flat in the first quarter of this year, posting a return of negative 0.07 percent and leaving the price index 19.2 percent above its 4Q2009 low-point, according to an index developed and published by the MIT Center for Real Estate (MIT/CRE).
"The first quarter performance represents a bit of a breather in the recovery of the institutional commercial property market that the index has been tracking since mid-2009," said Professor David Geltner, Director of Research at the Center. NCREIF sales volume was down sharply from last year's fourth quarter activity, with sales down from 91 to 70 by count and from $4.1 billion to $2.5 billion by dollar volume. Measured on a total return basis, including net cash flow generated by the properties (as well as the price change), the first quarter result was positive 1.05 percent. The price index level now stands at 165.95, and the cumulative total return index including income reinvested is at 729.76, in both cases based on a value of 100 at the beginning of 1984.
Among the four property sectors tracked by the index, the apartment sector turned in the best performance, up 2.5 percent in the first quarter to bring it to 25 percent above its 2009 low point and now within about 15 percent of its 2007 peak. Geltner noted that: "the apartment sector has benefited from relatively strong fundamentals as well as a relatively favorable financing environment since Fannie Mae and Freddie Mac can provide capital to the sector." The worst performing sector in the first quarter was retail property with a negative 1.34 percent return, though this still gives that sector a recovery of 19 percent (some 21 percent below its peak). Office and industrial properties were both down about 0.7 percent in the quarter putting their post-crisis recoveries at 15 and 14 percent respectively.
The MIT/CRE not only publishes the price index based on closed deals, but also compiles indices that separately gauge movements on the demand side and the supply side of the institutional property market. The demand-side index tracks the changes in prices that potential buyers are willing to pay (sometimes called a "constant-liquidity" index of the market, because it tracks how much prices would have to change to keep a constant ability to sell as many properties at the same rate of trading volume). The supply-side index measures changes in the prices property owners are willing to accept. Geltner noted that: "The two sides of the market pulled apart in the first quarter, with demand side reservation prices falling 5.1 percent while the prices property owners were willing to accept rose 1.1 percent." This pulling apart explains the drop in trading volume noted above.
The TBI tracks the prices that institutions such as pension funds pay or receive when transacting commercial properties such as shopping centers, apartment complexes and office towers. The MIT Center's TBI is based on prices of National Council of Real Estate Investment Fiduciaries (NCREIF) properties sold each quarter from the property database that underlies the NCREIF Property Index (NPI), and also makes use of the appraisal information for all of the currently more than 6,000 NCREIF properties (presently worth over $250 billion in aggregate). Such an index — national, quarterly, transaction-based and by property type, and tracking demand and supply as well as prices — had not been previously constructed prior to its launch by MIT in February 2006. NCREIF supported development of the index as a useful tool for research and decision-making in the industry.
In an important development, Geltner announced that: "As of second quarter of this year the production and publication of the TBI will be passed from the MIT/CRE to NCREIF." Geltner added that: "we at MIT are very pleased with this transition as our role at MIT has been to develop and demonstrate this type of index always with the expectation and hope that the institutional real estate investment industry would find it sufficiently useful that a responsible industry association such as NCREIF would take it over." It makes sense for NCREIF to operate the TBI as the source of all the data used in the index is NCREIF. The MIT/CRE will continue to maintain a link on the Center's website to the TBI at its new home in NCREIF.