Real Estate 165Allan J. Lacayo

REAL ESTATE ECONOMICS

Economic Preliminaries

The Competitive ModelMany homogeneous

buyers/sellersProduct homogeneityHigh transaction

volumeElastic supply and

demandSpace/location

unimportantPerfect/complete

information

Real Estate: Many heterogeneous

buyers/sellers Product Heterogeneity Irregular transaction

volume Inelastic supply and

demand Space/location are very

important Information is less than

perfect or complete

Real Estate Characteristics

Uniqueness of each good/propertyFixed locationInterdependence of Land UsesLand is “long-lived”Fixtures are “long-lived”“Ownership” is “long-lived”Large transaction prices, and high

transaction costsLong “gestation” period

Real Estate Assumptions

“Highest and Best Use” principle

Uncertainty and the “Second Best” principle

Highest and Best Use

Physically practicalLegally permissibleMarket supportableEconomically feasibleProfit Maximizing

Second Best Theory

Interim projects serve as a moratorium on HBU to mitigate non-market, non-economic forces.

Adaptive projects preserve historical landmarks or assimilate environmental or natural features.

Use Principles

DevelopmentExpansion

RedevelopmentImprovementsMaintenance

Changes to STOCK of real propertyby use

The Urban Evolution process

Supply and Changes in Supply

Space is fixed in the short runSupply changes

(development/construction) are small in relation to stock

Supply of property services is more elastic“Expectations” about demand drive supplyReal estate development suffers an

“acceleration’ effectFinancing process is critical for supply

Demand and Changes in Demand

Employment (state/regional/local)IncomeShifts in industrial/economic focusMigration and other population shiftsTechnology changesWork culture and leisure culture