Key Takeaways
- • MSCI finds appraised values of U.S. private real estate assets diverged more from subsequent sale prices than in any other region covered by its annual study, introducing risk into the U.S. private-equity real-estate model.
- • Appraised values for U.S. central business district (CBD) offices had fallen only 43% from peak to midyear 2024, while the RCA commercial-property price index (CPPI) showed a 51% decline from peak for the same segment.
- • Annualized CPPI-based returns for CBD offices were about -33%, versus a -22% official total return based on appraisals, per MSCI's recalculation.
- • CBD-office cap rates rose 160 basis points from year-end 2021 to Q2 2024, according to MSCI.
- • MSCI recommends limited partners cross-check appraisal-based performance against multiple measures, including transaction-based indices, to identify outliers and assess valuation reliability.
Summary
A December 13, 2024 MSCI blog post argues that appraisal uncertainty in private real estate poses a risk to the U.S. private-equity real-estate model. MSCI's annual study found that appraised values of U.S. property assets diverged more from subsequent sale prices than in any other global region. The divergence is significant because the gating of withdrawals from some open-end funds during the commercial-property downturn exposed the link between valuation uncertainty and limited partners' (LPs') ability to access capital, according to the article.
Managers marked down asset values at different times and speeds during the repricing of U.S. commercial real estate that began in 2022. MSCI notes that this variation raises questions about how objective appraisal-based values are when managers can choose timing selectively. By contrast, public-market prices reflect transaction-day pricing rather than a target adjusted over time. MSCI also refers to the historical problem of self-appraisal in U.S. real estate, when firms valued their own assets and had incentives to conceal falling values, though it presents this as background rather than a current finding.
MSCI's analysis of central business district (CBD) offices illustrates the gap. The sector is experiencing its harshest downturn since the late 1980s and early 1990s development boom. Appraised CBD-office values had fallen 43% from peak to midyear 2024, while the RCA CPPI showed a 51% decline. Recalculating the MSCI U.S. Quarterly Property Index using CPPI trends produces a noisier series with quarterly returns below -10% in parts of 2023, weaker than the post-global financial crisis returns of the official index. Annualized, the transaction-based calculation implies about -33%, versus -22% for the official appraisal-based total return. MSCI attributes the smoothness of the official index to the appraisal-based capital-value component. Cap rates for CBD offices rose 160 basis points from end-2021 to Q2 2024. MSCI states that without independent third-party confirmation, LPs cannot determine whether differences reflect asset quality or management choices.
MSCI concludes that open-end funds' promise of liquidity depends on whether assets can be transacted at carrying values, and that valuation uncertainty can distort incentives for both general partners and LPs. Its recommended practical step is for LPs to compare multiple performance measures to identify outliers that may skew reported results.
Managers marked down asset values at different times and speeds during the repricing of U.S. commercial real estate that began in 2022. MSCI notes that this variation raises questions about how objective appraisal-based values are when managers can choose timing selectively. By contrast, public-market prices reflect transaction-day pricing rather than a target adjusted over time. MSCI also refers to the historical problem of self-appraisal in U.S. real estate, when firms valued their own assets and had incentives to conceal falling values, though it presents this as background rather than a current finding.
MSCI's analysis of central business district (CBD) offices illustrates the gap. The sector is experiencing its harshest downturn since the late 1980s and early 1990s development boom. Appraised CBD-office values had fallen 43% from peak to midyear 2024, while the RCA CPPI showed a 51% decline. Recalculating the MSCI U.S. Quarterly Property Index using CPPI trends produces a noisier series with quarterly returns below -10% in parts of 2023, weaker than the post-global financial crisis returns of the official index. Annualized, the transaction-based calculation implies about -33%, versus -22% for the official appraisal-based total return. MSCI attributes the smoothness of the official index to the appraisal-based capital-value component. Cap rates for CBD offices rose 160 basis points from end-2021 to Q2 2024. MSCI states that without independent third-party confirmation, LPs cannot determine whether differences reflect asset quality or management choices.
MSCI concludes that open-end funds' promise of liquidity depends on whether assets can be transacted at carrying values, and that valuation uncertainty can distort incentives for both general partners and LPs. Its recommended practical step is for LPs to compare multiple performance measures to identify outliers that may skew reported results.
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