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Understanding Commercial Property Price Indexes

Mick Silver - October 2013

Speed Read
  • Constructing commercial property price indexes is problematic since properties within each sector such as offices, retail, industrial are heterogeneous and transactions are irregular.
  • Appraisal-based indexes avoid the problem of limited transaction data, but they provide unduly smoothed and lagged representation of commercial property price inflation.
  • An international effort is under-way in the USA and Europe to collate and compare data on real estate price indexes for use in economic policy, particularly financial stability.
  • Major concern is that existing indexes will be used in country and multilateral country analysis with limited understanding of their deficiencies.

Introduction
The compilation of commercial property price indexes (CPPIs) is highly problematic. Commercial properties include offices, retail, industrial and residential (owned or developed for commercial purposes) properties. Even within each of these categories properties are heterogeneous and transactions irregular thus complicating comparisons of average transaction prices for a fixed-quality bundle of properties over time – the type of methodology that would be applied in compiling a consumer price index. Even where matched (repeat) transactions can be used, the population of properties sold more than once in the period of the index can be very limiting and unrepresentative of the total population of commercial properties. Further, between any two transactions for the same property, the ‘quality’ of th...

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