Chapter 5 Location Real Estate Principles A Value

Chapter 5: Location Real Estate Principles: A Value Approach Ling and Archer

Outline n n n Market needs and timing The life of a city The shape of a city Location patterns Sprawling and sustainability

Market needs and timing n n n The textbook authors state that “many developers have learned that …… if the market they had counted on is not there when their projects are completed, it is beyond their power to create it. ” Implications: (1) understanding market needs is important, and (2) if needs vary over time, timing is important. To understanding market needs, one needs to study urban economics (this chapter).

Ways to controlling risk, if so desired n n n You many want to avoid RE investments that have a high market risk, e. g. , land development where the end user is not already locked in. Invest in a city with greater diversity of economic activities and greater capacity to withstand the downturn of one particular industry in that city. Diversify RE investments across geographic areas and property types.

City: why live close? n n n Why people tend to live together to form a city? Reason: the demand for proximity; access (i. e. , location) to economic activities, such as production and exchange. If one lives far away from a city, this person needs to travel. Traveling is costly and time consuming, which is typically not optimal.

The location of a city n n n The intersections of different modes of transportation. Example: NYC (Hudson River transit intersected with the Atlantic Ocean), London, Shanghai, etc. Mining and resource extraction. Example: Fairbanks, AK (gold and oil), SF. High quality of living. Example: Sedona, AZ.

The growth of a city n The study on the growth of a city is approached from two aspects: (1) the demand side, and (2) the supply side.

The demand side n n For the demand side, we ask the question of what the external world wants from the city (external demand). External demand is related to the notion of economic base. The economic base is the set of economic activities that a city provides for the world beyond its boundaries. Thus, economic base is also called export base. Stronger economic bases are associated with urban growth and higher RE values.

Location quotient n n One indicator of a community’s economic base is called a location quotient: the ratio between the percentage of employees in a certain type of work or job classification in a community and the percentage of employees in that same type of work or job classification nationally. If the ratio exceeds 1, it indicates that the activity is a base economic activity. U. S. Census provides data for the calculation of location quotients: http: //www. census. gov. Google “American Fact. Finder. ”

Multiplier n n Different cities have different economic (export) bases. Some types of economic bases have stronger positive impacts on local developments, i. e. , higher economic base multipliers, than the others. The economic base multiplier is higher if the cash flow brought by export activity circulates and re-spends within the community more frequently and for a longer time period.

An example of higher multiplier n n n Many cities promote leisure activities and tourism. This economic base has a high multiplier. A large share of cash flows brought into a community through tourism goes to food and hospitality services that must be locally produced (local jobs). The cash flows earned by local labor tend to be respent through grocery shopping, rent, etc. , within the community for a long period of time. See what happened to the median housing prices in Las Vegas from 2002 ($147 K) – 2006 ($318 K) – 2012 ($130 K) – 2018 ($280 K).

Regulation on multiplier n n n In San Francisco, many local restaurants are suffering from a shrinking customer base as a result of an increasing number of tech companies in the area that offer employees free lunches provided by company-owned cafeteria. The problem has become so dire that the city is considering a new law to prohibit new companies entering the area from running employee cafeterias. But as it turns out, San Francisco is hardly the only place in America’s hot tech scene that’s mulling an “anti-free lunch” campaign. Source: Observer, 08/13/2018

The supply side n n For the supply side, we ask the question of what a city can offer to the world. The usual list of offers: (1) skilled labor, (2) universities, (3) quality of life, (3) local government (tax) support and leadership, (4) industry economics of scale, e. g. , Silicon Valley, (5) agglomeration economics (big enough? ): the emergence of specialized resources, e. g. , shipping terminals and specialized financial services (example: NYC and LA).

A model for the shape of a city n n n The bid-rent model assumes that everyone travels to the central business district (CBD) to work. Because traveling is costly, one would prefer living at a locality that is near the CBD. That is, there is stronger demand bidding for a locality near the CBD. This stronger demand leads to a higher rent, and thus a higher house value and price. The bid-rent curve is also called rent gradient.

An example, I n n Hourly wage rate is $20. Round-trip travel to CBD is at 20 mph. Households rent lots for motor homes. Workers make 20 round-trips per month to CBD.

An example, II n n What is the time cost of travel? At 20 mph, with a wage rate of $20 per hour, $1. 00 per mile. How much is saved per month by living 1 mile closer? 20 round-trips x 2 x $1 = $40. Conclusion: workers will bid $40 per month to live 1 mile closer to CBD. Suppose that the farthest household from CBD commutes 3 miles.

The bid-rent curve

Implications, I n n A single-center city: the closer to the CBD, the higher the property value. The cost of traveling is individual-specific. Wealthy professionals have a higher cost of opportunity and thus a higher cost of traveling. The model at its simplest form predicts that they tend to live close to the CBD. Implication: wealthy people tend to get good location, and there is an economic separation between rich households and poor households.

Gentrification or integration n n In the 1960 s and ’ 70 s, cities were decimated by white flight, riots and the decline of manufacturing. Major urban cores have been on the upswing, attracting millions of new residents. Neighborhoods from Fort Greene in Brooklyn to the Mission District in San Francisco have become wealthier — and whiter — in the process. Defend Boyle Heights, a coalition of scorched-earth young activists from the surrounding neighborhood — the heart of Mexican-American L. A. — who have rejected the old, peaceful forms of resistance (discussion, dialogue, policy proposals) and decided that the only sensible response is to attack and hopefully frighten off the sorts of art galleries, craft breweries and single-origin coffee shops whose arrival typically mark a neighborhood’s point of no return. Source: Yahoo News, 03/05/2018

Defend Boyle Heights’ protest at the Laura Owens’s opening Source: Hyperallergic. com

Implications, II n n n What if the size of the city is abnormally huge? Say the farthest household from CBD commutes 30 miles. What is the rent at CBD? Jing-jin-ji. https: //www. youtube. com/watch? v=Yjo J 8 Tr 6 o 1 A

Jing-jin-ji n n n A super megacity with a 130 million population (current population is about 105 million). Capital investment is about 70% of the GDP. The size of the Jingjinji is about the size of the New England.

Limitation n n The bid-rent model is intuitive, but not complete. The reason for this is that the model considers only one dimension of linkage, i. e. , access need (the single-person commute). The reality is that households (and businesses) have multiple needs of access: to (good) schools, to friends, to privacy, to shopping, etc. All of these linkages enter into the household’s bid for a location.

Location dynamics n n These linkages change over time, therefore the value of a location changes over time. Forces: (1) advances in transportation (cars and light rails), (2) technological changes (airconditioning and electronic lighting in 1930 s introduced large retailing facilities outside the CBD), and (3) social movements (the smart growth movement has made some old CBDs livable again). Question: If MA government builds a 30 -mile direct light rail from Marlborough to Boston downtown, what would happen to the RE prices in Marlborough? Implication: must take the dynamics into consideration.

San Diego experience n n n 46% premiums for condominiums and 17% for single-family housing near Coaster commuter rail stations in the north county. 91% premiums for parcels near downtown Coaster stations and 72% premiums for parcels near trolley stations in the Mission Valley. Source: Realtor. org

How about high speed rail? n n Suppose that you own a residential property nearby the new high speed rail station in LA. Question: Would the good access to the high speed rail significantly increase the value of your property?

The sustainability of high speed rail n n n Having the world’s largest high-speed rail network with a low transportation density is indicative of significant financial risk. The ongoing construction … place a greater debt burden on China Railway Corp. (CRC), which runs the network, and local governments, making it a “gray rhino, ” or obvious threat to the Chinese economy. China’s high-speed rail mainly relies on debt financing, and the construction of the high-speed railway has caused CRC’s debt to surge almost tenfold from 476. 8 billion yuan ($70. 70 billion) in 2005 to 4. 72 trillion yuan in 2016. CRC’s total passenger revenue reached 169. 3 billion yuan in the first half of 2018, and could possibly reach 340 billion yuan for the entire year. Note: revenue barely covers interest expense. Source: Caixin, 01/29/2019

Sustainability of going really fast n n n Going fast means pushing air out of the way, which also requires a lot of power. A train travelling at 300 mph (480 km/h) uses roughly 27 times more power than one travelling at 100 mph (160 km/h). Going fast = emitting much more CO 2. And at ground level the air is a lot denser than it is at 35, 000 ft (10, 600 m) where airliners regularly cruise. That means more resistance, and therefore more vibrations. Vibrations = much more expensive infrastructure and much higher initial capital outlay. Source: BBC

HSR sustainability in California n n n When it comes to the environmental costs and benefits of high -speed rail (HSR) versus cars or planes, or even heavy rail, such as Amtrak, Californians assume that HSR is the clear winner. But is it? The answer is, it depends. UC Berkeley researchers found that high-speed rail has the potential to be the lowest energy consumer and greenhouse gas emitter only if it consistently travels at high occupancy or uses a low-emission electricity source such as wind. For example, a car with five passengers is energy-equivalent to California’s planned HSR with 1011 passengers. A typical HSR has a full capacity of about 500 -900 passengers. Eurostar (London-Paris) seats 750 at most. Source: ITS Berkeley

Cut losses? n n n California Gov. Gavin Newsom declared Tuesday there "isn't a path" for completing the state's plan for a high-speed rail line between San Francisco and Los Angeles. A high-speed rail line linking Los Angeles to San Francisco was the goal when voters approved a ballot measure in 2008. The roughly 520 -mile line initially was estimated to cost $33 billion and was pegged for completion in 2020. Subsequent estimates more than doubled the cost to $77 billion and pushed the timeline to 2033. "Let's be real, " Newsom said. "The project, as currently planned, would cost too much and take too long. ” Source: NBC, 02/12/2019

Multi-CBDs n n It is apparent that by 1945 the form of a city departs from a single-center city. Harris and Ullman (1945, Annals, American Academy of Political and Social Science, 242, pp. 7 -17) coined the term “multinuclei city. ” The motor vehicle, combined with new technologies of production, had propelled urban activities away from the single CBD. The failure of W. T. Grant.

Use-specific n n n RE investment is about location, and location. The tricky part is that a good location for one particular type of land use (shopping mall) may be a weak location for another type of land use (industrial park). Location (and value) is use-specific.

Central place location n Central place location: a location pattern where similar economic entities, e. g. , regional malls, tend to disperse evenly over the market region. These entities tend to involve in convenience activities. Example: regional malls, bakeries, supermarkets, coffee boutiques, etc. Implication: A new suburban city with enough population may have a central locality that is ideal for a convenience good or service provider, e. g. , regional shopping mall or a Barnes and Noble.

Central place pattern Maximum Market Area

Clustering location n Clustering location: this is where similar economic entities tend to cluster due to the following 2 reasons: (1) Comparison activities: customers prefer comparison shopping and a large selection. Example: apparel stores within a shopping mall or club districts. (2) Industry economics of scale. By clustering, firms engaged in the same kind of activity may create mutual efficiencies. Example: high-tech industrial parks.

Location, what location? n Suppose that you are thinking about opening a laundry store. What kind of location will be ideal?

Sustainability of city growth n n The size of the city has implications on the sustainability and efficiency of the city: (1) traffic (i. e. , less efficiency), (2) pollution, (3) income inequality, (4) public safety (e. g. , crime, terrorist attacks) (5) quality of living (e. g. , education, parks, etc. ). Megacity: >10 million population.

Tokyo metro map: 2210 stations, 158 lines

Traffic: ring roads and sprawling n n n When a city has a single CBD, the growth of the city is often accompanied by the increase in ring roads. Beijing: 1 st ring: 1920 s, 2 nd ring: 1980 s, 3 rd ring: 1990 s, 4 th ring: 2000 s, 5 th ring: 2000 s, 6 th ring: 2010 s, 7 th ring: 2016. Ring roads provide a bypass and was thought to be a good way to reduce city traffic. Reality: more ring roads, more development along ring roads, more residents, more needs for road use, more traffic. 5 th ring is about 6 -8 miles from the CBD. The average commute time is 97 minutes each way.

Individual Assignment n n Conduct a “walk-the-site” research according to Study Questions #3, p. 158. The report is due in a week.