Real Estate Income and Value Cycles: A Model of Market Dynamics

Abstract

We develop a theoretical real estate cycles model linking economic fundamentals to real estate income and value. We estimate and test an econometric model specification, based on the theoretical model, using MSA level data for twenty office markets in the United States. Our major conclusion is that cities that exhibit seemingly different cyclical office market behavior may be statistically characterized by our three-parameter econometric specification. The parameters are MSA-specific amplitude, through the CAP rate, cycle duration (peak-to-peak), via the rate of partial adjustments to changing expectations about stabilized NOI and the market trend.