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
–Location Quotient (Base = 1)
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, MBSs, and 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
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)