US OFFICE MARKET VALUES DURING THE PAST DECADE - HOW DISTORTED HAVE APPRAISALS BEEN

The leading time series of real estate returns is the Russell-NCREIF ( RN) Properly Index. The RN series tracks returns, cash flow plus appra ised capital gains, for multiple property types, To evaluate the accur acy 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 to 1991 and compares t hese with a real value series based on the RN capital-gain component. The RN-based series runs 30% above the highest of the benchmarks throu ghout the 1986-1989 period. While this overstatement is consistent wit h the development of a price bubble, failure of the bubble to burst un til 1990-1991 is implausible. Peal estate experts recognized overvalua tion in assessments as early as the spring of 1986. The RN Office-Mark et Index was slow to register price declines when the markets first we akened and then overstated the rate of decline once the market began t o bottom out. This pattern likely reflects incentives for appraisers t o smooth potentially temporary price volatility and for investment man agers to maintain appraised values in declining markets. It traces as well to systematic differences in the character and condition of the p roperties that lend to trade at different stages of the real estate cy cle. These incentives and differences provide reason to believe that o ther RN Indexes were similarly distorted.