MIT Launches Groundbreaking Commercial Property Index

The MIT Center for Real Estate and Real Capital Analytics, Inc. are launching a set of pioneering indexes for tracking commercial investment property prices in the United States, the center director and RCA president said in a joint announcement today.

The MIT Center for Real Estate (MIT/CRE) developed the new suite of 29 indexes to support derivatives trading such as index return swaps, and said the new indexes will support the world’s first active futures market for commercial real estate.

In making the announcement, MIT/CRE director David Geltner said, “The development of an active futures market, which does not currently exist for commercial property, would greatly increase the efficiency of the real estate industry.

“It will address such long-standing problems with real estate investment as high transactions costs, lack of liquidity, inability to sell ’short’ and difficulty comparing investment returns with securities such as stocks and bonds.”

Residential real estate futures are currently traded actively on the Chicago Mercantile Exchange using the S&P/Case-Shiller Home Price Indices.

“This index is a major step in the evolution of commercial real estate as an accepted asset class by providing benchmarking and hedging capabilities never before available,” said RCA president Robert M. White Jr. “We have further developed our database to meet MIT index development needs,” he added.

According to Geltner and White, a consortium of firms is currently developing plans to enable trading of futures derivatives on the family of indexes as soon as the first quarter of 2007. Even before that, the new indexes will be published on the web sites of MIT/CRE and RCA and will be available free of charge as an information service to the academic and industry research communities.

Henry Pollakowski, co-director of the MIT/CRE’s Commercial Real Estate Data Laboratory, said the new indexes achieve a number of firsts:

“We have developed the first true monthly national index that does not involve a moving average across past months; the first ‘primary markets’ (top 10 metropolitan areas) quarterly indexes for each of the four major property types — office, apartment, industrial, retail; and the suite of 29 basic indexes includes the first annual indexes for specific property types in specific metropolitan areas, such as office buildings in New York.”

Pollakowski also noted that the new MIT/CRE indexes are the “first regularly produced commercial property indexes based on repeat sales of individual properties, of the same basic index construction method as the Case-Shiller/S&P housing indexes that underlie the new Chicago Mercantile Exchange housing futures contracts.

“Such econometrically rigorous index construction methods are necessary to track the same-property price changes that are of the type actually faced by property investors.”

In addition, the suite of 29 indexes includes quarterly indexes for the four property types at the national level and annual regional indexes for each of the property types.