Moody Updates Commercial Property Price Index CPPI

[JW Najarian]

Moody’s New Commercial Property Price Index

May 29th, 2012  ::  Reblogged from CRE Console

Moody’s recently conducted a conference call to summarize the changes to their Commercial Property Price Index (CPPI).

The major enhancements to the index include:

• Two stage annual-to-monthly frequency conversion: more signal, less noise, no lag.
• Segmentation of the six major “gateway” markets versus rest of US for each property type.
• “Building block” indices equal-weighted while roll-up composite indices are value weighted.
• CBD and suburban office sectors treated as effectively two different property types.
• Prior sale threshold of $2.5 million is inflation adjusted to remove any bias.
• Results not “frozen” and constantly revised based upon all available and most current data.
• All indices monthly, faster reporting cycle.

Minor tweaks include:

• Distressed sales to third parties included, foreclosures by lenders not valid
• Pairing of non-sequential sales of same property allowed, provided all other filters are passed and no overlap with other pairings
• Flip filter reduced to 12 months from 18 month holding period
• Extreme returns filter is set to exclude any paired observation in which the annualized return exceeds +/- 50%

What will remain the same?

• Real Capital Analytics continues to be source of data
• Only valid, arms-length sales included
• A series of filters are employed to ensure that the prior and current sales are comparable, do not represent a material change in use or size, each transaction is reflective of market pricing

So, what do these changes look like when compared to the prior index and its methodology?

They’ve also better formalized their Major Market Index, which was previously called the Six City Index.

All-in-all, fabulous improvements to a fabulous index.

[View the entire presentation]

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MY THOUGHTS

By JW Najarian

I would like to thank CRE Console for posting this story.

I am glad to see the CPPI is back. I used to get this information via the MIT site.

http://web.mit.edu/cre/research/credl/

Many predictions of future growth were made using the old method and with all the changes it seems to show that growth is at more like 15% or better as opposed to the old graph which showed more of a 3% growth rate over time.

With the inclusion of more filters and better data I would have predicted a slower growth rate, not faster?

This would be good news. If this new graph is less gamed than the last then we have to ascertain that this new growth makes the commercial markets very hot.

Although this is not the news I hear from the trenches?

From 1984 till early 2000 there was an average appreciation of around 8%, (see the Transactional Based Index (TBI) graph below) then it went crazy… then it went bust.

Yes I know there is a difference between TBI and CPPI, but I wanted to show the years in full and I have not seen a CPPI Graph that covers this many years.

The TBI graph is very interesting as it shows that we back on track and that transactions are growing at around 19%. According to history this means either a leveling out or the start of another bubble.

Does the CPPI graph, with it’s high rate of growth predict another bubble, even before we recover from the last one?

I would like to hear everyone’s thoughts

 

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