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Five Property Types' Real Estate Cycles as Markov Chains

Author

Listed:
  • Richard D. Evans

    (University of Memphis)

  • Glenn R. Mueller

    (University of Denver)

Abstract

Metro market real estate cycles for office, industrial, retail, apartment, and hotel properties may be specified as first order Markov chains, which allow analysts to use a well-developed application, ¡§staying time¡¨. Anticipations for time spent at each cycle point are consistent with the perception of analysts that these cycle changes speed up, slow down, and pause over time. We find that these five different property types in U.S. markets appear to have different first order Markov chain specifications, with different staying time characteristics. Each of the five property types have their longest mean staying time at the troughs of recessions. Moreover, industrial and office markets have much longer mean staying times in very poor trough conditions. Most of the shortest mean staying times are in hyper supply and recession phases, with the range across property types being narrow in these cycle points. Analysts and investors should be able to use this research to better estimate future occupancy and rent estimates in their discounted cash flow (DCF) models.

Suggested Citation

  • Richard D. Evans & Glenn R. Mueller, 2016. "Five Property Types' Real Estate Cycles as Markov Chains," International Real Estate Review, Global Social Science Institute, vol. 19(3), pages 265-296.
    • Handle: RePEc:ire:issued:v:19:n:03:2016:p:265-296
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    References listed on IDEAS

    as
    1. William C. Wheaton, 1987. "The Cyclic Behavior of the National Office Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(4), pages 281-299, December.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Real Estate Cycle; Markov Chain; Commercial Real Estate; Staying Times?;
    All these keywords.

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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