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

Abstract

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.

Search for a Common Factor in Public and Private Real Estate Returns

“…Real estate returns are negatively correlated with stock market liquidity. Consistent with Cannon and Cole [2011] and others, there is a strong positive relation between real estate returns and real estate liquidity.…”

“…Such predictable and persistent autocorrelation reflects the smoothing inherent in returns that results from the appraisal process. This suggests a link to Cannon and Cole [2011], who find that appraisals are off by 12% on average from transacted prices and lag prices in both rising and falling markets. According to Cannon and Cole, NPI appraisal error is systematic and has a macro influence.…”

A House Price Valuation Based on the Random Forest Approach: The Mass Appraisal of Residential Property in South Korea

“…From a practical perspective, the 1 It also implies that the superiority of the RF predictor in the previous section did not result from the fact that we were allowed to use information from the "future"−i.e., more recent information for less recent appraisals. results are a demonstration that the accuracy of a machine learning-based mass appraisal can be surprisingly high in some cases (Note that the MAPE of human appraisals is 12% in Cannon and Cole, 2011). We infer that the high predictive power derives from a combination of the features of the RF model and the data set we applied.…”

“…Relative to the predictive models in previous studies in Limsombunchai (2004), Selim (2009), Antipov and Pokryshevskaya (2012), and Čeh et al 2018, the performance measures of RF−R 2 values (97.6%), mean absolute percentage error (MAPE, 5.482%), coefficient of dispersion (COD, 5.484%), and hitting rate−achieved significantly stronger results. Although it is difficult to compare experiments conducted in different samples, the results in this paper may also indicate that the accuracy of systemic appraisal can be surprisingly high (Note that the MAPE of human appraisals is 12% in Cannon and Cole, 2011).…”

Reducing the property appraisal bias with decision support systems

“…Bowles et al (2001) assert that property portfolio performance is based on valuation as a proxy for transaction price. Despite the general assumption that inaccuracy in valuations is likely to cancel out, Bowles et al (2001) and Cannon and Cole (2011) prove that the portfolio performance is under-or overvalued. In fact, Bowles et al (2001) reinforce the argument that the aggregate performance of a property portfolio may not necessarily be due to its underlying investment performance.…”