Transcript Slide 1

Supply and Demand in the Space Market
$25
REAL ESTATE SUPPLY CURVE
REAL RENT
$20
KINK
RISING
LRMC
$15
FALLIN
G
LRMC
EXISTING
QUANTITY
$10
$5
3.5
David M. Harrison, Ph.D.
Texas Tech University
4
4.5
5
5.5
QUANTITY OF SPACE (Mil SF)
6
Real Estate Investments
6.5
Shape of RE Space Market Supply Curve
 Why might LRMC be Rising?
 Costs more to build the next unit than the last one


•
 Why might LRMC be Falling?
 Costs less to build the next unit than the last one


•
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
Long-run Equilibrium Rent
 Long-run Equilibrium Rent:
=
=
=
=

David M. Harrison, Ph.D.
Texas Tech University
Note: You need to forecast changes in both future demand
and future supply, and consider than the “kink point” moves
out with increases in the current stock of supply.
Real Estate Investments
Evaluating Changes in Demand
 Starting in Equilibrium:
Notes:
 Starting with Excess
Notes:
Supply:
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
Evaluating Changes in Demand
 Starting with Excess
Notes:
Demand:
 What About LRMC?
David M. Harrison, Ph.D.
Texas Tech University
Notes:
Real Estate Investments
House Prices and Inflation
CPI General Inflation Index (solid line) and CPI Housing
Component (dashed line): 1967-2004
1982-84 = 100
200
180
160
140
120
100
80
60
40
20
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
2002
1997
1992
1987
1982
1977
1972
1967
0
More Market Definitions
 Asset (Property) Market –
 Vreal estate assets
 Further Delineating Capital Markets
Markets –
 Private Markets –
 Debt Markets –
 Equity Markets –
 Public
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
R.E. in U.S. Capital Markets
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
Size of U.S. Real Estate Markets
U.S. Capital Market Sectors, a $70 Trillion Pie
Private Debt
(49% RE), 16%
Public Debt
(22% RE), 30%
Private Equity
(78% RE), 30%
*Corporate real estate owned by publicly traded firms, plus
REIT s.
Source: Authors' estimates based on Miles & T olleson
(1997) updated with FRB statistics.
David M. Harrison, Ph.D.
Texas Tech University
Public Equity
(17% RE*),
24%
Real Estate Investments
Size of U.S. Real Estate Markets
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
The Real Estate System
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
Asset Markets and Property Values
 Commercial property prices are typically quoted
in terms of “Cap Rates”
Current AnnualNet Incom e
CAP RATE 
Pr operty Price
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
Cap Rate Determinants
 Opportunity Cost of Capital



 Growth Expectations



 Risk



David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
Market Segmentation
 Space Market
 Segmented due to type and location specificity
 Asset Market
 Generally not segmented. Money is money, and
financial capital easily flows from one project to
another.
 Asset prices adjust such that expected returns
are the same for properties with the same risk,
across different property market segments
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
The Development Industry
 Development is a creative, entrepreneurial
process characterized by…






David M. Harrison, Ph.D.
Texas Tech University
R.E. Development is therefore dealing with the dynamic
“cutting edge” of the physical built environment.
This makes development the most cyclical branch of
the real estate industry.
Real Estate Investments
Construction Starts
Apartment
Office
Retail
Warehouse
Hotel
8%
7%
6%
5%
4%
3%
2%
1%
Source: Property & Portfolio Research, Inc.
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0%
Negative Feedback Loops
Mechanisms within a system that
tend to dampen the changes in
the system, helping to keep it in
control, preventing it from
spiraling out of control.
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments
Feedback Loops in the Real Estate System
David M. Harrison, Ph.D.
Texas Tech University
Real Estate Investments