Chapter 2 What drives Real Estate Markets Real

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 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 Pro. Forma 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”? ¨ 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: – – – – 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: – – – – 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

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