Annual investment returns for U.S. holdings in commercial real estate -- a sector favored by big pension funds -- hit an unprecedented high of 34 percent in 2005, the MIT Center for Real Estate announced today.
The finding is one of many from a first-of-its-kind index, just unveiled by the center, that tracks the value of commercial real estate, which over the past 30 years has joined stocks and bonds as a major investment vehicle.
Historically, it has been difficult to keep current on investment performance in this sector. While the performance of stocks and bonds can be tracked daily because they are publicly traded, holders of commercial real estate don't reveal comparable information.
The MIT quarterly index, the first tool released by the Center for Real Estate's new Commercial Real Estate Data Laboratory (CREDL), uses sophisticated statistical techniques and proprietary transactions data provided by the National Council of Real Estate Investment Fiduciaries (NCREIF) to create an accessible source for this information.
NCREIF is a nonprofit industry-governed organization consisting of firms that invest pension money; together the firms hold more than $200 billion in commercial real estate in nearly 5,000 properties nationwide.
"The index addresses the need for a 'fundamental asset class research' index of real estate investment performance and market conditions," according to center director David Geltner. "It is designed to tap the capabilities of modern econometrics to distill information from property transaction prices. The result is an index that provides the academic and industry investment research communities with information not currently available."
Last year's record 34 percent return made institutional private real estate investment a champion performer compared to other major asset classes in 2005. The S&P 500 return was 4.9 percent in 2005 (its highest during the past 20 years was 37.4 percent in 1995). The NAREIT Equity REIT Index came in at 12.2 percent in 2005 (its highest in the past 20 years was 37.1 percent in 2003). Returns for the Ibbotson Small Stocks Index and the Lehman Brothers Govt/Corp Bond Index were in the 5 percent to 6 percent range for 2005, while the Morgan-Stanley EAFE International Stock Index had a total return of 14 percent. (Source: Ibbotson Associates Inc.)
According to the MIT index, the previous highest total return for commercial real estate was 23 percent in 1997. The average annual return for the entire period studied (1984-2005) was slightly under 10 percent. Investment returns in 2005 for the four major commercial property types -- office, retail, apartment and industrial -- were all high, ranging from 29 percent to 40 percent.
The index is based on transaction prices of 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 almost 5,000 NCREIF properties. Such an index -- national, quarterly, transaction-based and by property type -- has not been previously constructed. It covers the period 1984-2005, and will be updated quarterly by the CREDL initiative of the MIT Center for Real Estate.
NCREIF has encouraged development of the index, citing the need for better tools for research and decision-making in the industry.
MIT CREDL's co-director Henry Pollakowski said, "This has been a major undertaking; there is demand for this information, and we have been driven by this demand to take this undertaking very seriously to get the most precise results possible."
Effective today, the MIT Center for Real Estate web site, web.mit.edu/cre, presents a set of 15 indexes, along with extensive documentation. For "all property" and the four property types, results are presented for total investment return, price growth and the underlying supply and demand indexes "behind" the price indexes. All results are available free of charge to the public.
A version of this article appeared in MIT Tech Talk on March 1, 2006 (download PDF).