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CRE Index Reference Guide

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CRE Index Reference Guide

Anyone who has a stake in commercial real estate investments can benefit from having a better idea of where the markets are headed, and that’s exactly why commercial real estate indices exist.

A commercial property price index (CPPI) is a barometer for the general health of the CRE market collectively across the country. The index is based on time series analysis of appraised property values across markets and sectors as well as CRE transaction data for properties that are in the process of being sold.

A commercial property price index shouldn’t be confused with a transaction-based index (TBI), which isn’t as timely. A transaction-based index uses actual transaction prices to adjust appraised value and estimate price changes in CRE. There are also commercial real estate indices that focus on other economic drivers like interest rates and sentiment.

A commercial real estate index doesn’t provide predictive analytics that can be applied to specific property types or an individual market, but the analysis tells you the direction that things are headed. Understanding what the CRE landscape looks like in general is valuable information that can help you develop an investment strategy and make a CRE portfolio as profitable as possible.

Keeping the 4 Primary CRE Capital Markets in Mind

Commercial real estate investment doesn’t have to involve the direct purchase or sale of a property. Since there are other CRE investment vehicles that could be part of a portfolio, a conversation about commercial real estate indices isn’t complete without discussing CRE capital markets. A capital market is a market in which investors are buying and selling both equity and debt instruments. In commercial real estate, the equity and debt instruments are attached to properties.

An example of a CRE capital market investment would be buying mortgage loans to make income off the interest. Or you can buy shares in a real estate investment trust (REIT) to earn dividends from revenue generation across a collection of properties.

In commercial real estate there are four primary capital markets:

  • Private Equity
  • Private Debt
  • Public Equity
  • Public Debt

Commercial property price indices provide essential information on the capital markets and their price dynamics. Funds flowing between the sectors and macroeconomics are directly related to capital markets. Because price indices look at data points on a national scale, they give you insight into the larger economy that can affect investing in CRE capital markets. There are also niche indices like the CBRE Capital Markets Recovery Index that provide more detailed data for investors.

Prominent Commercial Real Estate Indices to Follow

Today there are a number of commercial property price indices reporting more data than ever before. While some indices aggregate near identical data points, there are variations. The most commonly utilized CRE indices include:

SIOR

SIOR Commercial Real Estate Index

Created by: Society of Office and Industrial Realtors

Commercial Property Sector: High-value properties

The SIOR index has a range of 0 to 200 that is updated quarterly. Low ratings suggest weak pricing and high ratings suggest high pricing. SIOR gets its data through surveys with experts in local markets across the country.

Green Street CPPI

Green Street’s Commercial Property Price Index

Created by: Green Street Advisors, LLC

Commercial Property Sector: High-quality and institutional-quality CRE properties, non-core commercial sectors

The data used for Green Street’s index comes from REIT property portfolios. The index is value-weighted and updated monthly. This appraisal-driven CPPI is now putting more emphasis on the growing non-core property sectors, which sets it apart from a number of other indices.

FRED

FRED Commercial Price Index

Created by: Federal Reserve Bank of St. Louis

Commercial Property Sector: General

FRED stands for Federal Reserve Economic Data. The FRED Index provides quarterly updates on CRE prices that aren’t seasonally adjusted. It pulls data from a wide variety of national, international, public, and private sources.

FRED Interest Rates & Price Index

FRED Commercial Real Estate Interest Rates & Price Index

Created by: Federal Reserve Bank of St. Louis

Commercial Property Sector: General

Using data from the Board of Governors of the Federal Reserve System, this FRED index takes a closer look at commercial real estate interest rates in millions of dollars, not seasonally adjusted.

NAIOP CRE Sentiment Index

NAIOP Commercial Real Estate Sentiment Index

Created by: Commercial Real Estate Development Association

Commercial Property Sector: General

The NAIOP Index gauges sentiment surrounding commercial real estate using a scale of 0-100. A number below 50 means respondents think the CRE market will worsen over the next 12 months. A rating above 50 means that people have a positive outlook for the health of the CRE market in the next 12 months. Sentiment has a real impact on the CRE capital markets and can affect the flow of funds. Using this commercial property price index gives investors and portfolio managers a better idea of how freely funds should flow to commercial real estate vehicles.

CoStar CCRSI Composite Index

CoStar Commercial Repeat Sales Indices (CCRSI)

Created by: CoStar

Commercial Property Sector: Low-value CRE properties

CoStar releases its Commercial Repeat Sales Indices monthly along with 30 quarterly sub-indices that cover additional information and break the data down by property sector, region, and market size. There are both equal-weighted and value-weighted measurements. Because CoStar focuses on low-value CRE properties, it’s well suited for individual CRE investors and local banks that are providing funds for CRE transactions.

RCA

RCA Commercial Property Price Index

Created by: Real Capital Analytics

Commercial Property Sector: General

The Real Capital Analytics (RCA) Commercial Property Price Indices is a collection of indices that are updated on either a monthly or quarterly basis. In total, there are 10 commercial real estate indices that are available to the public.

BIS

BIS Commercial Property Price Index

Created by: Bank for International Settlements

Commercial Property Sector: International residential and CRE markets

BIS indices are released monthly, quarterly, bi-annually, and annually. The Commercial Property Price Index includes data from 19 countries and is published monthly. The price indices are primarily meant to provide central banks with CRE pricing data, but investors can benefit from the data as well.

CRE Momentum

Commercial Real Estate Momentum Index

Created by: Federal Reserve Bank of Atlanta

Commercial Property Sector: Primary CRE markets

This commercial real estate index measures the momentum of change within the national CRE market. The CRE Momentum Index’s time series analysis includes data on 20+ market variables in 300 commercial real estate markets.

Determining Fair Market Value with a Commercial Property Price Index

Commercial real estate pricing isn’t the same as the residential market. Many other factors related to income production, return on investment and yield factor into CRE valuations to determine a fair market value based on Net Operating Income (NOI). Outside forces like inflation and the potential return on investments in other sectors also play a role.

Even though price indices have been around since the 1990s and continually provide more information, they are only a piece of the market value puzzle. You won’t want to estimate the market value of an individual property using commercial property price indices alone since local market factors aren’t factored in. This is especially true for CRE investors that take a “value-add” approach and seek out properties that can be bought at a discount then improved for added value.

The real value of CRE indices is they provide foundational knowledge that you can build on. Commercial property price indices aggregate data on numerous economic drivers that influence the performance of the market as a whole. It all boils down to a single number that indicates CRE property value changes over a certain period of time. It’s an indication of the overall health of the U.S. CRE industry at the moment and how it’s been trending over the long-term.

When an index score is low, that indicates low pricing. When the score is higher than the median, it indicates higher prices and prices that are on the rise.

The CRE price indices give you a general idea of the market value. It’s a starting point, but commercial property prices are much more nuanced than that single number.

When a commercial real estate index is measuring commercial real estate prices, it does so using U.S. data points only. Commercial real estate is simply too diverse globally. Factoring in data points from foreign economies would likely skew the information, making the foundational knowledge inaccurate. 

The “Zillow” Solution for Gauging Commercial Property Prices

There are existing CRE tools that share some commonalities with Zillow, but as of this writing, there’s no real equivalent resource for commercial real estate. With the advances in proptech that could soon change, but for now, the CRE indices are about the best investors are going to get in terms of aggregated pricing and market data. 

One of the closest CRE resources to Zillow is Loopnet. It’s a commercial real estate MLS system that’s owned by CoStar and used by brokers. Much of the information isn’t readily accessible to the general public. Other commercial real estate sites are primarily used to market commercial listings, not provide deep pricing data.

The property pricing indices help to fill the information void for those who don’t have a Loopnet account. Indices like the CRE Momentum Index and RCA CPPIs are available to the public without a subscription. The latest data and charts are available right on the index’s website, and the data can even be downloaded. Some indices like FRED also provide tools that allow users to interact with the data and change views. The indices provide deep analytics compared to some tools, but each individual commercial property price index is far from all-encompassing.

For now, the best thing CRE investors, brokers and occupiers can do is pull information from each one of the property pricing indices since there’s no “Zillow” solution that aggregates CRE pricing data within a single platform for public consumption.

Of course, this can make analyzing index data and other metrics in a comprehensive way challenging. A CRE software solution like RefineRE is needed to pull data from the various commercial property price indices for you so that the workload is much more manageable. All that data can also be organized and viewed in a way that makes it more usable for your distinct purposes. Custom reporting helps tease out more granular insights from the national data that may otherwise be missed.

What Can Be Learned From Commercial Property Price Indices

Historically, data on commercial real estate prices have been hard to come by, and price indices alone won’t tell you the market value of a specific property. However, there’s a lot to learn from analyzing the data that comes from a commercial real estate index.

Here are some important takeaways about the commercial real estate market that can be answered using a commercial property price index.

Total Value of the Commercial Real Estate Market in the U.S.

This is the clearest piece of information that you get from using a commercial property pricing index. The indices are meant to give you an idea of the general health of the CRE market and how things are trending. They don’t provide an exact monetary value, but the property price indices tell you if the total value is going up or down.

How Funds Are Flowing in the Capital Markets

As mentioned previously, indices that measure sentiment provide insight into how active the capital markets might be and where funds will be flowing. It’s pertinent information for future CRE investments or those who are looking to fund a CRE project.

How CRE Prices Are Trending

Commercial real estate prices are difficult to nail down, but the pricing indices give you a clear view of how things are trending on a national level. A single rating will tell you whether commercial property prices are on the rise or declining. Keeping tabs on trending prices can help you figure out the best time to buy and sell.

Potential Risks in the Commercial Real Estate Industry

Another thing you may learn is what types of CRE investments to avoid. Potential risks within the commercial real estate industry can be identified using sentiment data and commercial property price indicators (CPPIs). Negative sentiment suggests that a CRE sector may carry too much risk. CPPIs can be used to monitor the financial stability of markets and macroeconomic developments that could make certain CRE investments more risky.

What CRE Price Indices Won’t Tell You

CRE indices won’t tell you specifically:

  • How much your commercial property is worth.
  • The value of a CRE investment portfolio.
  • What a commercial property is worth per square foot.
  • Good ROI on a commercial real estate investment.

Far more goes into calculating the exact value of a property beyond information found in the indices. The only way to estimate the market value of a particular CRE property is to analyze local market data on a deeper level along with the pricing index data. CRE data analysis tools like RefineRE make this much easier to do by giving you a single platform that brings all of the data together and helps you visualize it in meaningful ways.

REITS & Commercial Real Estate

A real estate investment trust (REIT) is another investment vehicle that involves CRE. REITs are actually companies that either finance or own real estate that generates income. Their portfolio includes various property types in locations across the country. Some REITs also purchase residential and commercial mortgages to generate revenue through interest charges.

REITs allow for direct investment in real estate capital markets. Investors can buy shares in a REIT, and that money is used to fund both commercial and residential real estate transactions. Like a mutual fund, an REIT involves many investors that pool their capital together. Individual investors get dividends from the revenue that’s generated through rental income and/or proceeds from a sale.

REITs are highly influential in residential and commercial real estate because they help developers secure funding for future projects. They also impact real estate financing given that buying pools of mortgages from banks and investment companies provides the capital to fund more mortgages. In this way, REITs are a factor in increasing the number of real estate transactions that can be financed.

There are several upsides to investing in a REIT. For starters, investors are without much capital since they’re only providing a small portion of the funds. Many investors also like the fact that the REIT is handling the day-to-day management duties.

Another key advantage of REIT investments is that the risk is lower due to the diversification of properties that are owned. However, that diversification can make it difficult for investors to evaluate REITs and compare them. And while REIT investments do tend to provide a steady flow of regular income, they often don’t have high rates of capital appreciation.

Investors that are interested in REIT investments can get in the game rather easily. Most REIT shares are publicly traded. They are sold and bought just stocks. However, there are private and non-traded REITs that are less liquid but more stable.

Before choosing an REIT you’ll want to analyze:

  • Expected growth in earnings per share.
  • Current dividend yields.
  • Funds from operations (add amortization and depreciation to earnings before subtracting gains on property sales).

Your best bet for identifying the best REIT stock is often a knowledgeable broker that has access to data analytics tools. The data points noted above can be aggregated for more comprehensive analysis of a REITs performance.

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