Real Estate Markets

Space and Asset Markets

• Markets– A mechanism for exchange of goods and/or

services (Information/Cost Efficiency)

• Space Markets– The market for the right to use real estate (both

land and buildings)

• Asset Markets– The market for the right to receive cash flows

generated by activity in the space market

Space Markets

• User/Rental Market– Our initial focus in this class

• Tenants– Source of Demand

• Landlords– Source of Supply

• Rent– Negotiation between Demand/Supply sources

Space Market Segmentation

• Immutable nature segments markets by– Property Type

• Residential, Office, Retail, Special Use

– Location• CBD, Suburban, Rural

– Tenant Type• Single tenant vs. Multi-tenant

– Type of Occupancy• Renter vs. Owner (ignored in rental market analysis)

Residential Property Types

• Single Family– Typically Owner Occupied– Detached (Low Density Planned Development)– Attached (Medium Density)

• Townhouses

• Multi-Family (High Density)– Typically Renter Occupied

• Garden Apartments• Apartment Style Condominium Developments

Commercial Property Types

• Type of Tenancy– Single Tenant (Free Standing) vs. Multi Tenant

• Retail Development– Shopping Centers (Strip vs. Mall)

• Neighborhood Center (<100,000 sq.ft.)

• Community Center (100,000 – 300,000 sq.ft.)

• Regional Center (300,000 – 750,000 sq.ft.)

• Super Regional (>750,000 sq.ft.)

• Superstore, Specialty, Factory Outlet Centers

Commercial Property Types

• Office Development– Location of Property

• Downtown (Financial/Government Center)• Suburban (Decentralization)

– Project Type• Garden• Mid/High Rise• Condominium

– Classes of Property• Class A, Class B, Class C

Commercial Property Types

• Hospitality Development– Source of Demand

• Leisure vs. Business

– Location of Property• Highway, Airport, Downtown, Resort

– Types of Service• Budget, Limited Service, Full Service, Convention

Industrial Property Types

• Manufacturing & Distribution– Office Warehouse vs. Service Center– Flex Space– Bulk Distribution– Heavy Manufacturing

• Research & Development– High Tech, Biomedical, Engineering

• Location– Airport (Distribution), Manufacturing (Rural)

Demand and Supply for Space

• Demand– Typically a function of employment growth

• Office & Industrial

• Drives Housing and Retail Growth as well

• Supply (Short Run)– Supply Function = Long Run Marginal Cost– “Kinked” at the equilibrium rental rate

• Vertical at the current quantity of space (Inelastic)

• Generally Horizontal at greater quantities (Elastic)– Rising if Land is Scarce/Falling due to decentralization

Urban Growth

• Economic Base– The primary source of income for a city– Allows us to measure growth potential

• Type and Quantity

– Export Activity• A city’s excess consumed in other locations

– Service Activity• Product intended for local consumption

Measuring Growth

• Economic Base Measures– Location Quotient (Base = 1)

http://www2.fdic.gov/recon/index.asp

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Asset Market

• Market for claims on future cash flows– Our focus through most of the class

• Part of the larger Capital Market– Real estate competes with stocks and bonds

• The Capital Asset Market is divided into– Public and Private Ownership– Equity and Debt Claims– Where do these fit in?

• REITs, Single property, MBS's, & Indv. Mortgages

Asset Market Returns/Value

• Based on three primary components– Opportunity Cost of Capital

• Real estate returns relative to stocks, bonds, etc.

– Growth Expectations• Both Net Income and Asset Appreciation

– Risk Level• Greater certainty of cash flows increases value

Linking Space & Asset Markets

• The Four Quadrant Model– Developed by DiPasquale & Wheaton (1992)– A picture of the Real Estate System

• In Long Run Equilibrium

– Allows consideration of Systemic Effects• Due to changes in the Space Market

Levels of Market Analysis

• Macro Market Study– May consist of an entire city or a sub-market

• Focus varies generally with size of the city

– May focus on market wide absorption rates

• Micro Market Study (Marketability)– Class of or specific property and potential uses– What we will focus on in this class– Assists in micro-level valuation/invest. analys.

• Forecasting cash flows (lease-up)

Steps in Micro Market Analysis

• Define the Product (property productivity)

• Define Users of the Property (Delineation)

• Forecast Demand Factors

• Forecast Supply (Competitive Inventory)

• Analyze Supply/Demand Interaction (Residual)

• Forecast the property’s market capture

Define the Product

• The Physical Attributes– Site & Improvements (size, age/quality, design)

• Legal Attributes– Zoning, private (deed) and public restrictions

• Locational Attributes– Analysis of Linkages

• Transportation & Utility (at capacity?)

– Urban Growth Determinants• Growth influencing features (reputation, services)

Define the User

• Delineation of the Market– Consider the reach of the property analyzed

• Regional office complex

• Neighborhood Shopping Center

• Single Family Subdivision (Commuter or Local)

– Construct a defined boundary for analysis– Determine the target sub-market

• Given the subject property characteristics

Forecasting Demand

• Factors Affecting Demand– Population, Employment & Income

• Sources of Forecast– Regional Development Authorities

http://www.atlreg.com/– Analyst Developed Forecast

• Using trend analysis (census & chamber data)

– Comparable City Analysis

• Refine sources to estimate subject demand– Include Timing (current & future)

Critical Demand Variables

• Housing Markets– Population (forecast), Income, Household Size,

Age of Residents, Rental vs. Owner Occupancy

• Retail Markets– Population, Disposable Income, Household

Size, Spending Patterns

• Office Markets– Employment (forecast) by SIC, % employed in

office space, Occupied space per employee

Forecasting Supply

• Survey Existing Supply– Property name, size, occupancy level, amenities– Excess vacancy must be considered– Use comparable properties (internet, guides)

• Research Imminent Additions/Demolitions– Interview city planners, developers, Realtors®

• Rank existing & future supply– Determine the subjects place in the ranking

• Estimate supply over time (current/future)

Equilibrium Analysis & Conclusion

• Reconcile Demand & Supply Estimates– Provide an equilibrium estimate over time– Consider market acceptable vacancy rates

• Use estimates to indicate market conditions– Current (undersupply, oversupply, balanced)– Future (using intervals 6 mo., 1 year, etc.)

• Apply to subject expected market capture– Is development feasible?– What is my cash flow expectation? (existing)