Abstract
M.Ing.
One of the features of institutionalized markets is the concentration of assets in the hands of a
few individuals which necessitates the management of not only the risk of individual assets and
loans, but more importantly, that of the portfolio and the aggregate risk thereof. Even when
individual commercial real estate (CRE) loans are prudently underwritten, concentrations of
loans that are similarly affected by cyclical changes in the economy can expose an institution to
an unacceptable level of risk if not properly managed. The management of demand risk is of
particular importance given that CRE assets are procured on the basis of their income
producing ability. The suggestion by various authors has been that supply side issues such as
overbuilding are major cause of downside in the real estate market. In this text however the
suggestion is that demand side issues; specifically the failure to track and account for demand
volatility contributes greatly to overall CRE risk. Analysis of the structure and system of the CRE
markets reveals that the system of interdependency amongst the various participants, which
determines the overall market outcomes, necessitates a systems approach. The findings of this
analysis and systems approach suggests, that perhaps the majority of CRE models currently
employed are incorrectly specified as they either fail to account for the multivariate environment
or ignore the qualitative aspects of the investment decision totally. Using a systems framework,
the author, through a literature review, demonstrates the successful application of both
quantitative and qualitative models in modelling a design solution that is informed by the
multiple determinants of demand.