U.S. Office Market Values During the Past Decade: How Distorted Have Appraisals Been?

Posted: 3 May 2000

See all articles by Patric H. Hendershott

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Abstract

The leading time series of real estate returns is the Russell-NCREIF index (RN). The RN series tracks returns, cash flow plus appraised capital gains, for multiple property types. To evaluate the accuracy of the capital- gains component of the office-market return series, this paper constructs two benchmark measures for the present value of projectable office-market cash flows from 1982-1991 and compares these with a real value series based on the RN capital-gain component. The RN-based series runs 30% above the highest of the benchmarks throughout the 1986-1989 period. While this overstatement is consistent with the development of a price bubble failure of the bubble to burst until 1990-1991 is implausible. Real estate experts recognized overvaluation in assessments as early as the spring of 1986. The RN office-market index was slow to register price declines when the markets first weakened and then overstated the rate of decline once the market began to bottom out. This pattern likely reflects incentives for appraisers to smooth potentially temporary price volatility and for investment managers to maintain appraised values in declining markets. It traces as well to systematic differences in the character and condition of the properties that tend to trade at different stages of the real estate cycle. These incentives and differences provide reason to believe that other RN Indexes were similarly distorted.

JEL Classification: G00

Suggested Citation

Hendershott, Patric H. and Kane, Edward J., U.S. Office Market Values During the Past Decade: How Distorted Have Appraisals Been?. Available at SSRN: https://ssrn.com/abstract=6172

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Edward J. Kane

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
520-299-5066 (Phone)
617-552-0431 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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