Smoothing in Commercial Property Valuations: Evidence from Individual Appraisals

We explore the causes and extent of appraisal smoothing, defined as a temporal lag bias in appraisals, by analyzing how appraisers use the transaction price data available to them. We test the empirical validity of the partial adjustment model that underlies the traditional “unsmoothing” of benchmark return indexes. We reject the no‐lag null hypothesis and find that the extent of bias‐inducing behavior appears to vary over time in the manner suggested by rational appraisal behavior as the quantity and quality of contemporaneous transaction information changes. We find evidence that appraisers valuing the same property in consecutive periods anchor onto their previous appraised values, resulting in more lagging than first‐time appraisals. An implied policy prescription is for investment managers to rotate appraisers so as not to allow the same appraisal firm to consecutively value the same property.