Commercial Real Estate Analysis and Investments, D. M. Geltner, N. G. Miller, J. Clayton, P. Eichholtz
DiPasquale-Wheaton 4-Quadrant Model: Interactive Guide
Why can property prices rise while rents barely move? And why does a surge in demand create an immediate response in rents, but a different long-run outcome? The DiPasquale–Wheaton four-quadrant model connects the space market, property valuation and construction to explain these relationships.
It separates the stock of space already available from the flow of new construction. That distinction matters: rents and asset values can respond to changed conditions while the existing stock remains fixed.
Watch: what happens when real estate demand rises?
This two-minute animation follows a demand increase through rents, property values, construction incentives and the long-run stock of space. Watch the example, then try the interactive model below.
Watch Part 2: what happens when cap rates fall?
In this second animation, the cap rate falls from 6% to 5%. Rent initially stays at $120/m²/year, while the property price rises from $2,000 to $2,400/m². Higher prices encourage construction; as the stock of space grows, rent falls and the model reaches a new long-run equilibrium.
How the four quadrants connect
- Space market — top right. Demand and the available stock determine rent. Holding demand unchanged, more space means lower rent; at a fixed stock, stronger demand means higher rent.
- Asset market — top left. Annual net rent is converted into property value using the capitalization rate: P = R / i. At the same rent, a lower cap rate means a higher price.
- Construction — bottom left. Property prices are compared with development costs. Higher prices relative to costs strengthen the incentive to build; when prices are too low to cover the model’s minimum development cost, that incentive falls to zero.
- Stock adjustment — bottom right. New construction adds space, while depreciation removes it. In a long-run steady state, construction replaces depreciation: C = δS.
A closed contour links four mutually consistent values: rent, price, construction and stock. The immediate response is different: stock is still fixed, so it does not form a new, complete long-run equilibrium.
Explore the model
Start with Demand change set to +20%. Press Run scenario to reveal the baseline, then use Next to follow the connections. Here, a 20% demand increase means 20% more desired floor area at the baseline rent; it is not a 20% increase in rent or in space already built.
Use the other cases to isolate a cap rate change or a construction cost change. In Combined scenario, several parameters change together. Edit the inputs, then press Run again to apply a new case; typing alone does not alter the current lesson.
Expand Study each step to compare the diagrams, or select Download lesson PDF after running a scenario. Baseline assumptions contains the shared starting parameters.
Read the results in two stages
Immediate: the existing stock is unchanged. The displayed construction figure is a construction incentive, not newly completed buildings. If that incentive drops to zero, the existing stock does not disappear immediately.
Long run: the model solves for a consistent equilibrium in which construction equals depreciation. The steps explain economic connections and compare calculated outcomes; they do not forecast adjustment years, construction delays or the speed of change.
Updated observations from U.S. data
The updated charts below use U.S. data with explicitly stated periods and definitions. They provide evidence alongside the model; they do not calibrate its illustrative baseline or describe the Georgian property market.
U.S. residential rent and consumer prices
January 2000–August 2026 · monthly, seasonally adjusted
Rent outpaced general prices over this period. Between January 2000 and August 2026, the rent index rose by 148.4%, compared with 97.4% for all-items CPI. Dividing the rebased rent index by the rebased CPI index gives an inflation-adjusted rent increase of approximately 25.9%. This U.S. period does not support a blanket assumption that real rents stay flat.
U.S. listed REIT implied cap rates by sector
2001 Q1–2026 Q2 · rolling four-quarter series, percent
Cap rates fell over the full period, but the decline was not continuous. Between 2001 Q1 and 2026 Q2, all four plotted sectors recorded a net decline in their rolling four-quarter implied cap rates. Compared with 2021 Q4, however, all four were higher by 2026 Q2. Office REITs rose from 5.88% to 7.40%, and industrial REITs from 3.51% to 5.24%. These are public-market valuation measures, not cap rates observed in private property sales. The chart shows changes in income-to-value ratios; it does not establish that lower cap rates alone explain property-price growth.
DiPasquale–Wheaton model: key questions
What is the DiPasquale–Wheaton four-quadrant model?
It is a real estate equilibrium model that links four outcomes: rent in the space market, property price in the asset market, annual construction and the stock of space. The four quadrants show how a change in one market passes through the others.
How does higher demand affect rent and property prices?
With the existing stock fixed, stronger demand raises rent first. Through P = R / i, the higher rent raises property value and the incentive to build. In the long run, additional stock partly offsets the initial pressure on rent.
What happens when the capitalization rate falls?
At the same rent, a lower capitalization rate raises property price because P = R / i. The higher value strengthens construction incentives; as stock expands, rent faces downward pressure until the model reaches a new long-run equilibrium.
Why is immediate construction called an incentive?
The immediate value is the amount developers would be encouraged to build under the new price and cost conditions. It is not completed floor area. The existing stock remains fixed in the immediate response.
Sources
- DiPasquale, D. and Wheaton, W. C. (1992), The Markets for Real Estate Assets and Space: A Conceptual Framework, Real Estate Economics, 20, 181–198.
- Geltner, D. M., Miller, N. G., Clayton, J. and Eichholtz, P., Commercial Real Estate Analysis and Investments. Source of the reproduced four-quadrant diagram.