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Real Estate Valuation: The Effect of Market and Property Cycles

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Author Info
Waldo L. Born () (Lumpkin College of Business Lumpkin Hall, Room 249 Eastern Illinois University Charleston, Illinois 61920)
Stephen A. Pyhrr (Davis Realty Partners, Inc. 5929 Balcones Drive Suite 100 Austin, Texas 78767)
Abstract

Traditional real estate valuation models stabilize cash flow variables in a single- or multi-year pro forma, assume efficient markets, and impute property return/risk expectations into a current overall market capitalization rate to determine value. This traditional valuation framework is biased toward trend analysis and often assumes constant annual changes in rents and expenses and constant terminal value capitalization rates over a seven-to-ten-year projection period. Economic cycles are not explicitly addressed by the valuation framework or models. This study uses a cycle valuation model to evaluate linkages between real estate supply and demand cycles, equilibrium price cycles, inflation cycles, rent rate catch-up cycles, and property life cycles; translates their effects on cash flow variables; and demonstrates their significant impact on asset value. The cycle model results are then compared to those produced from traditional borrower and lender "trend driven" valuation models. The study results suggest that appraisers should develop cash flow models that explicitly incorporate cycle impacts in order to produce realistic present value estimates and valuation conclusions. Further, the market research process must be redefined and reorganized to produce information and data for use in cycle models.

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File URL: http://cbeweb-1.fullerton.edu/finance/journal/papers/pdf/past/vol09n04/v09p455.pdf
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Publisher Info
Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

Volume (Year): 9 (1994)
Issue (Month): 4 ()
Pages: 455-486
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Handle: RePEc:jre:issued:v:9:n:4:1994:p:455-486

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Postal: American Real Estate Society College of Business & Public Administration Florida Atlantic University MacArthur Campus, 5353 Parkside Drive Jupiter FL 33458
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Postal: Donna Cooper American Real Estate Society College of Business & Public Administration Florida Atlantic University MacArthur Campus, 5353 Parkside Drive Jupiter FL 33458
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L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Charles H. Wurtzebach & Glenn R. Mueller & Donna Machi, 1991. "The Impact of Inflation and Vacancy on Real Estate Returns," Journal of Real Estate Research, American Real Estate Society, vol. 6(2), pages 153-168. [Downloadable!]
  2. David J. Hartzell & David G. Shulma & Vice President, 1987. "Refining the Analysis of Regional Diversification for Income-Producing Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 2(2), pages 85-95. [Downloadable!]
  3. Stephen A. Pyhrr & Waldo L. Born & James R. Webb, 1990. "Development of a Dynamic Investment Strategy under Alternative Inflation Cycle Scenarios," Journal of Real Estate Research, American Real Estate Society, vol. 5(2), pages 177-194. [Downloadable!]
  4. Halbert C. Smith, 1986. "Inconsistencies in Appraisal Theory and Practice," Journal of Real Estate Research, American Real Estate Society, vol. 1(1), pages 1-17. [Downloadable!]
  5. James R. Frew & G. Donald Jud, 1988. "The Vacancy Rate and Rent Levels in the Commercial Office Market," Journal of Real Estate Research, American Real Estate Society, vol. 3(1), pages 1-8. [Downloadable!]
  6. Shilling, James D. & Sirmans, C. F. & Corgel, John B., 1987. "Price adjustment process for rental office space," Journal of Urban Economics, Elsevier, vol. 22(1), pages 90-100, July. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kicki Björklund & Bo Söderberg, 1999. "Property Cycles, Speculative Bubbles and the Gross Income Multiplier," Journal of Real Estate Research, American Real Estate Society, vol. 18(1), pages 151-174. [Downloadable!]
  2. Luis C. Mejia, 1999. "Availability of Credit and Loan Default: A Look at the Commercial Mortgage Supply Cycle," Journal of Real Estate Research, American Real Estate Society, vol. 18(1), pages 175-196. [Downloadable!]
  3. Terry V. Grissom & James R. DeLisle, 1999. "The Analysis of Real Estate Cycles, Regime Segmentation and Structural Change Using Multiple Indices (or A Multiple Index Analysis of Real Estate Cycles and Structural Change)," Journal of Real Estate Research, American Real Estate Society, vol. 18(1), pages 97-130. [Downloadable!]
  4. Max Kummerow, 1999. "A System Dynamics Model of Cyclical Office Oversupply," Journal of Real Estate Research, American Real Estate Society, vol. 18(1), pages 233-255. [Downloadable!]
  5. Robin A. Howarth & Emil E. Malizia, 1998. "Office Market Analysis: Improving Best-Practice Techniques," Journal of Real Estate Research, American Real Estate Society, vol. 16(1), pages 15-34. [Downloadable!]
  6. Stephen A. Pyhrr & Stephen E. Roulac & Waldo L. Born, 1999. "Real Estate Cycles and Their Strategic Implications for Investors and Portfolio Managers in the Global Economy," Journal of Real Estate Research, American Real Estate Society, vol. 18(1), pages 7-68. [Downloadable!]
  7. Yoon Dokko & Robert H. Edelstein & Allan J. Lacayo & Daniel C. Lee, 1999. "Real Estate Income and Value Cycles: A Model of Market Dynamics," Journal of Real Estate Research, American Real Estate Society, vol. 18(1), pages 69-96. [Downloadable!]
  8. Jacques Gordon & Paige MosbaughTodd Canter & Todd Canter, 1996. "Integrating Regional Economic Indicators with the Real Estate Cycle," Journal of Real Estate Research, American Real Estate Society, vol. 12(3), pages 469-501. [Downloadable!]
  9. Leon Shilton, 1998. "Patterns of Office Employment Cycles," Journal of Real Estate Research, American Real Estate Society, vol. 15(3), pages 339-354. [Downloadable!]
  10. Jim Clayton, 1996. "Market Fundamentals, Risk and the Canadian Property Cycle: Implications for Property Valuation and Investment Decisions," Journal of Real Estate Research, American Real Estate Society, vol. 12(3), pages 347-368. [Downloadable!]
  11. Tony McGough & Sotiris Tsolacos, 1999. "Interactions within the Office Market Cycle in Great Britain," Journal of Real Estate Research, American Real Estate Society, vol. 18(1), pages 219-232. [Downloadable!]
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