I GET AROUND: REAL ESTATE, DEVELOPMENT PLANS AND TRANSPORTATION
Dr Matthew F Gebhardt
October 18, 2013
Housing Land Advocates Conference
Agenda
Supply and Demand and Housing Markets
Assessment of Risk and Decision to Develop
Portland’s Rental Market
Supply and Demand
SupplyPrice
QuantityO
S0S2
Decrease
S1
Increase
Demand
QuantityO
D0
PriceD2
Decrease
D1
Increase
Supply and Demand
O
Pe1
Qe1
S1
g h
D1
D2
Pe2
Qe2
i
Price
Quantity
S2
jPe3
Qe3
Elasticity of Supply
P
QO
S0
D0 D1P
QO
S0D0 D1
Pe1
Qe1
Pe2
Qe2
Pe1
Qe1
Pe2
Qe2
Function of Housing Markets
Demand for housing depends on a wide variety of factors
Demand is determined by income, availability of substitutes and availability of complementary goods, rate of household formation, rate of mortgage interest, current housing price
Major factor in increased demand in Portland Metro Area is due to population growth, primarily from migration
Function of Housing Markets
Demand for housing is also extremely complex and fragmented
Big or small, near schools or near work, in Portland or Beaverton, buy or rent, old or new
Or maybe it’s simple: location, location, location
Distance from Center
Rent/Price
Bid-Rent
Function of Housing Markets
Supply is also based on a wide variety of factors Price levels in the recent past (1-2 year lag) Interest rates Land available for housing with proper zoning Construction costs
Speculative housing construction can have an effect
Function of Housing Markets
Housing markets do not function efficiently Imperfect information High search and transaction costs Stock variation
Tend to be highly localized Many submarkets
Prone to fluctuations
Net Operating Income/Costs
Assessment of Risk
Net Operating Income
Income after normal operating expenses have been deducted, but before non-operating expenses and debt service.
Calculation: Potential Gross Income- Vacancy and Concession Allowance Effective Gross Income- Operating Expenses Net Operating Income
Gross Operating Income 250,000Vacancy Factor (5%) -12,500Rent Concessions (0.5%) -1,250Effective Gross Income (EGI) 236,250
Real Estate Taxes 7,500Insurance 5,000Advertising 1,000Management 10,000Building Maintenance/Repairs 20,000Landscape Maintenance 5,000Turning Expenses 12,500Garbage 5,000Utilities 20,000Sewer/Water 15,000Reserves 2,500Total Operating Expense -103,500
Net Operating Income (NOI) 132,750
Construction Cost Estimates
Land Site preparation Infrastructure Hard Costs
Labor Materials
Soft Costs Marketing Operating
Legal fees Accounting costs Inspection costs Overhead/
administration Insurance Taxes Consultants
Contingencies Development fees
Develop or Not?
Comparison of expected NOI from the property to the cost of developing the property
If expected NOI is too low or costs are too high the perceived risk of the project may be deemed too great to proceed
Even if developer is willing to accept a lower return
($s)
Net Op. Inc.
Construction Costs
Develop or Not?
Lower rents (lower NOI) or higher costs can make risk of undertaking development greater
Equation can be changed through increasing NOI through: More total units (higher densities – although
this increases costs) Mixing or changing the mix of units (more
market rate) Subsidizing rents
Develop or Not?
It can also be changed by lowering costs including: Soft costs (design, entitlements) Finance costs (interest rates, more equity) Labor costs (non-union labor) Land costs (discounted land) Material costs (lower level finishes, smaller
units)
Of course, perception also plays a part
Portland Market
In Brief
Housing Affordability
Affordability Defined as ability or inability to gain access to
housing at market prices
Regional Variation What constitutes affordable housing in Portland
is quite different than what constitutes affordable housing in San Francisco
Two approaches to measuring affordability: ratios and residuals
Measuring Affordability
The ratio compares housing costs (prices, rents or mortgage payments) against income (wages, benefits, etc) It is often suggested 30-40% of household
income can reasonably be spent on housing
The residual looks at disposable income after the cost of a decent home have been deducted This suggests that there is an absolute
minimum disposable income required to sustain an acceptable quality of life; it is linked to poverty line estimates
Portland Area Affordability
Portland MetroOwner Occupied Housing Costs $1,471 $1,461 Renter Housing Costs $905 $934
% > 30% Portland MetroAll Households 40.20% 37.90%Renters 50.30% 49.40%
Source: 2012 ACS
Portland Area Affordability
1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 3Q 130
0.5
1
1.5
2
2.5
3
3.5
4
Portland Metro Vacancy Rates
Source: Norris, Beggs and Simpson
5% = Full Occupancy
Trade-Offs
Possible to trade off housing costs and other costs, especially transportation costs
Pay more than 30-40% for housing but walk, bike or take transit to work
Not always simple to make that trade off and more difficult with rising transit costs and service reductions
Questions? Answers?
Thank You for Listening!