Flexibility and Real Estate Valuation under Uncertainty

AppendixQuantifying Real Estate Uncertainty: Let’s Think about the Inputs for Real Estate Simulation Models

LEARNING OBJECTIVES

• Understand the big picture of the real estate system;
• Think about the sources of future uncertainty for real estate projects;
• Learn some practical tips for quantifying uncertainty in simulation;
• Understand the nature of real estate price dynamics and uncertainty;
• Review some relevant empirical evidence.

OUTLINE OF THE CHAPTER

1. A.1 The Real Estate System
2. A.2 Sources of Uncertainty and Some Practical Advice for Simulation
3. A.3 The Nature of Real Estate Price Dynamics and Uncertainty
4. A.4 Putting It All Together

In this Appendix, we want to tell you how we arrive at the real estate market price dynamics that we use, and how we simulate future real estate pricing to represent uncertainty, as realistically as we can.

In Chapter 7, we described how we use pricing factors to simulate future scenarios in the real estate market based on dynamics and probability functions that we input into the spreadsheet. We described a very basic and widely used dynamic pricing process known as the random walk. We described how private real estate markets include a random walk element but also include some other features: inertia (autoregression), cyclicality, and mean‐reversion.

In this Appendix, we want to take you a little deeper into the details, the nuts and bolts of our thinking and method for coming up with these important inputs. We want to give you ...