The Contemporary DPW Model for the Commercial Real Estate Sector and its Analytical Capabilities

Abstract This paper presents an adjustment of the classical DPW model, which includes two different interest rates and the secondary market in the commercial property market. Separating the mortgage rate from the discount rate helps to understand why not all investments which seem to be profitable are carried out. If the discount rate is much higher than the mortgage rate, the risk will prevent investors from entering this investment. In the longer run, the stock will depreciate, and the equilibrium amount of commercial space will decline. The other important point is the consideration of the secondary market, through which investors exit the market when profitability declines. Also the inclusion of a demand curve in the primary market and accounting for the fact that developers in the CRE market are mainly price or cost takers helps to understand our observations what we observe in the real world, much better.