What appraisers learned from the Great Recession of 2008-2009: the Delta Valuation Model

As the real estate markets enter a period of uncertainty associated with the Covid-19 pandemic, it is useful to consider how the valuation discipline coped with previous times of uncertainty. The Delta Valuation Model is a method for using changes in capitalization rates, lease rates, and vacancy rates to provide a measurable and supportable indication of the quantity of change in market conditions, the so-called time adjustment. It makes explicit what is implicit in the standard valuation formula V = I ÷ R and quantifies the effect of changes over time of I (net operating income) and R (overall capitalization rate). The Delta Valuation Model is a useful tool for quantifying changing market conditions in the absence of adequate local-market sales data. When local-market sales data do exist, they can also serve as a test of reasonableness. Such data provide a way to separate and account for the influence of macroeconomic forces and microeconomic (or local) sources. In declining markets, these data provide insight into economic obsolescence. This paper also discusses the limitations of the approach. Finally, an abbreviated real-life case study illustrates use of the model for valuation during the Great Recession.