Transcript Chapter 2 What drives Real Estate Markets?

Chapter 2
What drives Real Estate
Markets?
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Major Topics
 Real Estate economic and market
terms
 How Real Estate markets differ from
other asset markets
 How capital markets influence space
markets
 Short term and longer-term real
estate demand drivers
 Key demand and supply drivers by
property type
 Sources of data for market analysis
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Key Terms
 Price
 Rent
 ‘Subject’ property
 Submarket
 Space Segmentation
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Influences upon Rent & Prices
 Macro factors:
– Global influences
– National influences
 Micro factors
– Local submarket
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Rents and Prices:
Real Estate Demand Curve
Price
or Rent
As Price Decreases,
Quantity Demanded
Increases
& vice versa
Quantity
or Space
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Short Run & Long Run Supply Curves
Price
or Rent
Short Run
Supply Curve
Long Run Supply Curve
Quantity
or Space
Long Run Supply Curve is more Elastic
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Kinked Supply Curve
Price
or Rent
Supply is
added
when
Price is
above Pe
Pe
Quantity
or Space
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Uniqueness of Real Estate Markets:
Real Estate vs. Perfectly Competitive Markets
 Durability
 Large (Lumpy) Economic Unit
 Information is costly
 Transaction Costs
 Unique Location and Heterogeneity
 Government Intervention
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Market Analysis and Time
 Short Run: Less than one year
 Intermediate: 2-3 years
 Long Run: 4-5 years and longer
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Market Analysis and Time
 Short Run:
– Supply viewed as essentially fixed
– Extreme “seasonality” especially
in residential markets
– Interest Rates
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Market Analysis and Time
 Intermediate to Long Run:
– Employment Trends
– Will export base employment be
main driver of regional growth?
– Regional Demographic Trends
– Supply Constraints
– Regional Transportation Costs
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Direction of Rent & Prices
 We have no choice but to forecast
the future.
 However, there is enough
disagreement over the exact rental
rate trend which creates
opportunities for people
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Connection Between Capital
Markets & Physical Markets
 Interest Rates
 Capital Availability
 The importance of local real estate
fundamentals
 Capital driven business decisions
often ignore the supply demand
equation - hence can be very risky
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Space & Asset Market
Space
Market
Supply
Landlords
Local
Regional
National
Global
Economy
and Trends
Demand
Tenants
Occupancy and
Rents
New
Construction
YES
Profitable?
NO
Development
Industry
Cost
Including
Land
Cash
Flow
ProForma
Property
Value
Market
Require
d Rate
of
Return
given
Risk
Profile
Capital
Markets
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Asset
Market
Owners
Sellers
Investors
Buyers
Inevitable Real Estate Cycles
 Characteristics of Real Estate that leads to
cycles:
– Large economic and physical size
– Need for debt
– Government regulation
Typical Real Estate Cycle
Construction
begins and
accelerates as you
move up the curve
while vacancy
continues to
decline
Vacancy
declining and no
construction
Vacancy
increases yet
construction
continues unable
to stop
Vacancy increases at
a decreasing rate,
some construction
The Internet, Transport Cost
and Real Estate Markets
 Growth of internet:
– “Death of distance?”
– “Location, Location, Location”?
 Implications?
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Market Analysis
 Determine Dominant Demand Drivers
for specific property type
 Determine Dominant Supply Drivers
for specific property type
 Property Types:
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Residential Single Family
Residential Multifamily
Industrial
Office
Retail
Hotels
Parking Lots
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Sources of Demand Data
Note: web sites may have changed.
 www.worldchambers.com/america.html
 www.inrealty.com
 www.ired.com
 www.pikenet.com
 www.reisreports.com
 www.COSTARGROUP.com
 Government and Trade Associations:
– http://www.realestate.uc.edu/TRADES/tradeassc.html
– http://www.realestate.uc.edu/Government/usgov.html
 Lend Lease Real Estate Investments
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Sources of Demand Data
Note: web sites may have changed.
 Building Permit data:
– www.mag.fwdodge.com/index.htm
 Current Market Information:
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www.mmreibc.com
www.grubb-ellis.com
www.cbrichardellis.com
www.colliers.com
www.naiweb.com
www.staubach.com
www.corenetwork.com
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
END
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner