Comparing approaches to economic impact analysis of property redevelopment
| DOI | https://doi.org/10.1108/JPIF-09-2014-0060 |
| Date | 06 July 2015 |
| Pages | 362-373 |
| Published date | 06 July 2015 |
| Author | Christopher Hannum |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Comparing approaches to
economic impact analysis
of property redevelopment
Christopher Hannum
Department of Economics, Istanbul Technical University, Istanbul, Turkey
Abstract
Purpose –The purpose of this paper is to demonstrate the value of computable general equilibrium
(CGE) modeling for impact analysis of real estate developments and redevelopments.
Design/methodology/approach –Uses a model constructed for Colorado to compare estimates of
economic impact of a hypothetical mixed-use development from a CGE model with an input-output (IO)
model similar to those commonly used in applied economic impact analysis.
Findings –Economic impact estimates of construction activity are demonstrated to be lower when
using a CGE approach as compared to an IO approach while impact estimates of continuing operations
of a property are demonstrated to be more accurate and potentially higher using a CGE approach.
Practical implications –A CGE approach as opposed to an IO approach will be particularly useful
for practitioners in particular cases where IO models are ill suited to provide meaningful estimates
concerning impact of continuing operations. This is especially likely where commercial tenants are
unknown or when the development includes a residential component.
Social implications –More complete and accurate assessments of economic impact may positively
affect views on property development and redevelopment by the public and government.
Originality/value –This paper adds to the existing literature concerning economic impact analysis
of real estate and is the first paper in the field, to the authors’knowledge; to compare estimates from the
standard IO approach to those derived using more sophisticated modeling techniques.
Keywords Redevelopment, Economic impact analysis, Property development,
Computable general equilibrium models, Input-output models, Mixed-use property
Paper type Research paper
Introduction
A computable general equilibrium (CGE) model is an evolution of the input-output (IO)
modeling method (Dixon et al., 1992) of Leontief with a social accounting matrix (SAM)
of intermediate goods as its core. An IO model describes transactions between
industries as well as consumption shares by consumers within the SAM (Leontief,
1986). Given a final demand an IO model “solves”for output by industry through the
simple matrix equation x* ¼(I−A)
−1
d, where x represents output, A a matrix of inputs,
d final demand and I the identity matrix (Chiang, 1984). The model solves for industry
employment in a similar fashion. Multiplier effects for changes in final demand are
determined through the A matrix and used to predict impacts of shocks to final
demand (Leontief, 1986). A CGE model modifies the strict IO assumptions to allow pric e
changes, substitution between factors and goods and imperfectly elastic supply
(Menezes et al., 2006). Flexibility allows a CGE model to estimate impacts of that an IO
model cannot, such as supply-side shocks or tax changes (Frechtling and Smeral, 2010).
Any CGE model can be converted into an IO model by setting substitution elasticities
Journal of Property Investment &
Finance
Vol. 33 No. 4, 2015
pp. 362-373
©Emerald Group Publishing Limited
1463-578X
DOI 10.1108/JPIF-09-2014-0060
Received 14 September 2014
Revised 4 January 2015
Accepted 13 March 2015
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
The author is indebted to Steven Laposa, without his guidance the author would not have found
this field.
362
JPIF
33,4
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