INVESTMENT
Exhibit 1 shows the all-property NPI and the Hotel NPI component the since 1983 .
to an index ( i . e ., benchmarking ). The array of indexes reported by NCREIF allows for comparisons of property risk-adjusted returns to the appropriate indexes .
NCREIF ’ S HOTEL INDEX In Q4 2020 , NCREIF ’ s National Property Index ( NPI ) included 9,289 U . S . properties worth over US $ 700 billion . The NPI has many variants of the national aggregate index , including commercial property type indexes for apartment ( 1,943 properties ), hotel ( 69 properties ), industrial ( 4,387 properties ), office ( 1,610 properties ), and retail ( 1,280 properties ). Asset managers provide quarterly income and appraised value information to NCREIF for properties under their management . The organization only includes information voluntarily provided for member-managed properties in these indexes .
The large number of properties included in each of the indexes , except hotel , allows NCREIF to report returns by combinations of property type and geographic region ( e . g ., office , Midwest ) and market segment ( e . g ., retail , neighborhood ). The number of hotels in the NPI is quite small compared to other property types . Why ? The answer lies in the fact that NCREIF members do not control nearly as many hotels as the major property types ( the ‘ four food groups ’ as they are affectionally known ). The number of hotels in the index ranged from six in 1982 to 243 in 2012 .
The unfortunate consequence for hotel investors of so few indexed hotels is that the NCREIF hotel index is suspect for Markowitz-style diversification analysis , performance reporting to passive investors , performance benchmarking , loan underwriting , etc .
With under 100 reporting hotel properties the aggregate returns may be skewed to certain geographic areas , market segments , and price points . Importantly , sub-index reporting by hotel categories ( e . g .,
MSAs and chain scales ) is impossible with any degree of reliance . The NCREIF organization recognizes the small sample size issue for this index so it does not report hotel returns by subdivisions of the national hotel index .
Exhibit 1 shows the all-property NPI and the Hotel NPI component since 1983 .
Despite few underlying properties , the NCREIF Hotel Index tracks closely with the all-property NPI and shows hotel returns to be more volatile than commercial property returns in general , as expected . For the period 1983 through 2020 , the means are 8.27 % and 7 % for the NPI and NCREIF Hotel Index and the standard deviations are 7.25 % and 10.86 %, respectively . The relationships among these statistics raise basic risk / return questions .
WRAP-UP
The unfortunate reality about the NCREIF Hotel Total Return Index is that not enough properties are included each quarter to enable full usage by hotel investors . The aggregate ( i . e ., national ) hotel index return patterns are as expected over time , however hotel users likely would want disaggregated index numbers for benchmarking chain scales , locations , and MSAs .
A robust alternative to the NCREIF Hotel Index certainly is possible . The underlying property sample for an alternative would be large , consistent over time , and representative of many different hotel types . The alternative index would need to be computationally comparable to NCREIF and would afford hotel investors many options for return performance benchmarking .
36 hotelsmag . com May / June 2021