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The Great Recession and real estate cycles – challenges, opportunities, and lessons learned

Steven Laposa (A&M Insight Center, Alvarez and Marsal Holdings LLC, Denver, Colorado, USA)
Andrew Mueller (University of Denver, Denver, Colorado, USA)

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 3 April 2017




The purpose of this paper is twofold: the authors initially survey a sample of literature published after the Great Recession that address macroeconomic and commercial real estate forecasting methods related to the Great Recession and compare significant lessons learned, or lack thereof. The authors then seek to identify new models to improve the predictability of commercial real estate early warning signals regarding cyclical turning points which result in negative appreciation rates.


The authors develop a probit model to estimate quarterly probabilities of negative office appreciation returns using an alternative methodology to Tsolaco et al. (2014). The authors’ alternative method incorporates generally publicly available macroeconomic and real estate variables such as gross domestic product, office-related employment sectors, cap rate spreads, and commercial mortgage flow of funds into a probit model in order to estimate the probability of future quarterly negative office appreciation rates.


The authors’ models demonstrate the predictive power of macroeconomic variables typically associated with office demand. The probit model specification shows probabilities of negative office appreciations rates greater than 50 percent either as the quarterly office returns become negative, or in some cases several quarters before office returns become negative, for both the Great Recession and the recession occurring in the early 1990s. The models fail to show probabilities greater than 50 percent of negative office returns until after they occur for the recession in 2001. While this indicates need for further improvement in early warning models, the models do predict the more severe periods of negative office returns in advance, indicating the findings useful to real estate investors to monitor the changes in economic and real estate data identified as statistically significant in the results.

Practical implications

The Great Recession is a unique laboratory of significant contractions, recessions, and recoveries that challenge pre-recessionary real estate cycle models. The models provide guidance on which historical economic indicators are important to track, and gives a framework with which to calculate the probability that office prices are likely to decline. Because the models use macroeconomic indicators that are publicly available from at least one quarter in the past, the models or variations of them may provide real estate professionals with some indication of an impending decrease in office prices, even if that indication comes only one quarter in advance. Armed with this information, property owners, investors, and brokers can make more informed decisions on whether to buy or sell, and how sensitive their real estate transactions may be to timing.


The authors introduce several new models that examine the ability of historical macroeconomic indicators to provide early warning signals and identify turning points in real estate valuations, specifically negative office appreciation rates caused by the Great Recession. Using data from at least one quarter in the past, all the data in the models are publicly available (excluding National Council of Real Estate Investment Fiduciaries data) at the observed return quarter being predicted, which gives practitioners rational insights that can provide at least one source of guidance about the likelihood of an impending decrease in office prices.



Laposa, S. and Mueller, A. (2017), "The Great Recession and real estate cycles – challenges, opportunities, and lessons learned", Journal of Property Investment & Finance, Vol. 35 No. 3, pp. 321-340.



Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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