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Chapter 2:. The Real Estate System. The Real Estate System. 1. The development industry 2. Overview of the R.E. “system” 3. The “4-Quadrant” model (4QM) 4. Using the 4QM to understand “boom & bust” cycles in R.E. Financial Resources. New Built Space. Development Industry. Physical

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Chapter 2

Chapter 2:

The Real Estate System


The real estate system
The Real Estate System

1. The development industry

2. Overview of the R.E. “system”

3. The “4-Quadrant” model (4QM)

4. Using the 4QM to understand “boom & bust” cycles in R.E.


2 1 the commercial property development industry

Financial

Resources

New

Built

Space

Development

Industry

Physical

Resources

2.1 The Commercial Property Development Industry


The development industry
The Development Industry

Development is a creative, entrepreneurial process characterized by…

Vision

Greed

Cooperation

Risk

(All the most entertaining features of American capitalism.)


Development cont
Development (cont.)…

  • Cooperation:·Between public & private sectors;·Between developers & financiers.

  • Risk:·Even an economy in recession needs an existing stock of built space.·New space (need for development) results only from economicgrowth &/or change.


Development cont1
Development (cont.)…

R.E. Development is therefore dealing with the dynamic “cutting edge” of the physical built environment.This makes development the most cyclical branch of the real estate industry…


Exhibit 2- 1 US commercial property construction starts by property type as percent of existing stock…


2 2 the real estate system
2.2 The Real Estate System property type as percent of existing stock…


= Causal flows. property type as percent of existing stock…

= Information gathering & use.

Exhibit 2-2: The “Real Estate System”: Interaction of the Space Market, Asset Market, & Development Industry


Negative feedback loops
“Negative feedback loops”… property type as percent of existing stock…

Mechanisms within a system that tend to dampen the changes in the system, helping to keep it in control, preventing it from spiraling out of control.


Example
Example property type as percent of existing stock…:

A thermostat puts a negative feedback loop into a heating and cooling (HVAC) system in a building.·When the temperature in the building gets too low, the thermostat triggers the heater.·When the temperature in the building gets too high, the thermostat triggers the air conditioning. The result is that the building temperature remains “under control”, within a comfortable temperature range.


Concept check
Concept check: property type as percent of existing stock…

How do the development industry and the real estate asset market work together to provide a (long-run) negative feedback loop in the Real Estate System?…How can “forward-looking”behavior (good forecasting of the space market) in the development industry and R.E. asset market (capital market) improve this negative feedback loop?…


2 3 the 4 quadrant model 4qm
2.3 The “4-Quadrant Model” (4QM)… property type as percent of existing stock…


Exhibit 2 3 the dipasquale wheaton 4 quadrant diagram

D property type as percent of existing stock…

Rent $

Exhibit 2-3: The DiPasquale-Wheaton 4-Quadrant Diagram…

Space Market:

Rent Determination

Asset Market:

Valuation

D

R*

Price $

Q*

Stock (SF)

P*

C*

Asset Market:

Construction

Space Market:

Stock Adjustment

Construction (SF)



Exhibit 2 4a effect of demand growth in space market
Exhibit 2-4a: Effect of Demand Growth in Space Market cycles…

Rent $

Space Market:

Rent Determination

Asset Market:

Valuation

D1

D0

R1

R**

R*

P**

P1

P*

Price $

Q*

Stock (SF)

C*

Asset Market:

Construction

C**

Space Market:

Stock Adjustment

Construction (SF)


Exhibit 2 4b effect of demand growth in asset market

Rent $ cycles…

Exhibit 2-4b: Effect of Demand Growth in Asset Market...

Space Market:

Rent Determination

Asset Market:

Valuation

D0

11% OAR

D1

R*

8% OAR

R**

SR

LR

P1

Q**

P*

Q*

Price $

P**

Stock (SF)

C*

Asset Market:

Construction

Space Market:

Stock Adjustment

C**

Construction (SF)


Concept check1
Concept check… cycles…

1. What does the 4Q Model reveal about the interaction of the space market, the asset market, and the development industry in causing “boom & bust” cycles?

2. How can the an understanding of the 4Q Model help participants in the asset market and development industry to avoid “boom & bust” cycles? [Hint: Can the 4Q Model help with “forward-looking” decision-making?…]


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