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Real Estate Valuation: The Effect of Market and Property Cycles

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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.

Suggested Citation

  • Waldo L. Born & Stephen A. Pyhrr, 1994. "Real Estate Valuation: The Effect of Market and Property Cycles," Journal of Real Estate Research, American Real Estate Society, vol. 9(4), pages 455-486.
  • Handle: RePEc:jre:issued:v:9:n:4:1994:p:455-486
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    References listed on IDEAS

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    1. George W. Gau & Ko Wang, 1990. "A Further Examination of Appraisal Data and the Potential Bias in Real Estate Return Indexes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(1), pages 40-48.
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    6. 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.
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    Cited by:

    1. Maier, Gunther & Herath, Shanaka, 2009. "Real Estate Market Efficiency. A Survey of Literature," SRE-Discussion Papers 402, WU Vienna University of Economics and Business.
    2. Robert Edelstein & Desmond Tsang, 2007. "Dynamic Residential Housing Cycles Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 35(3), pages 295-313, October.
    3. 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.
    4. Eddie Chi Man Hui & Ka Hung Yu, 2006. "Simulating Hong Kong’s Office Leasing Market via System Dynamics Modeling," International Real Estate Review, Asian Real Estate Society, vol. 9(1), pages 23-43.
    5. Bartke, Stephan, 2015. "The economic role of valuers in real property markets," UFZ Discussion Papers 13/2015, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    6. 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.
    7. 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.
    8. 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.
    9. repec:spr:empeco:v:52:y:2017:i:4:d:10.1007_s00181-016-1101-9 is not listed on IDEAS
    10. 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.
    11. Leon Shilton, 1998. "Patterns of Office Employment Cycles," Journal of Real Estate Research, American Real Estate Society, vol. 15(3), pages 339-354.
    12. 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.
    13. 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.
    14. 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.
    15. 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.
    16. 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.
    17. Kim, k. & Suh, s. & Feridun, M., 2006. "Real State Business Cycle and Real Estate Policies: The Case of Korea," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 6(1).

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    JEL classification:

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

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