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Chapter 3 Central Cities and Regional Market Analysis. “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner. Major Topics. Why do cities exist? Why do cities of different sizes exist? What is a metropolitan statistical area?

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chapter 3 central cities and regional market analysis
Chapter 3Central Cities and Regional Market Analysis

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

major topics
Major Topics
  • Why do cities exist?
  • Why do cities of different sizes exist?
  • What is a metropolitan statistical area?
  • What are the primary causes of city growth, stability or decline?
  • Possible prototypes for cities of the future

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

why is city growth and decline important
Why is city growth and decline important?
  • Understanding the causes will lead to better decisions of all types
  • > 90% of the value of US real estate is in urban and urbanizing areas
  • In the U.S., urban centers are very spread out

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

key terms
Key Terms
  • Central Cities
  • M.S.A.:

“Metropolitan Statistical Area” >50,000 people

  • C.M.S.A.:

“Consolidated M.S.A.”

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

urbanized land
Urbanized Land

U.S. Census Bureau (www.census.gov)

recognizes, as of 1998:

  • 340 MSAs in U.S.A., some of which are constituents of the 19 recognized CMSAs
  • Almost 80% of all U.S. residents reside in urbanized MSAs
  • MSAs constitute nearly 18% of total U.S. land area
  • “Urbanized” Land actually makes up less than 5% of the land area of U.S.

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

essence of a city
Essence of a “City”
  • A dense collection of inhabitants of relatively large population
  • Where none of the citizens make their living directly from agricultural activity
  • Where the social and economic relationships are relatively complex and hierarchical

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

city causing phenomena
“City-causing” phenomena
  • Economies of Scale
  • Economies of Agglomeration
  • Positive Locational Externalities
  • Fixed “break bulk” points and distribution centers

- Centripetal Forces

- Cumulative Causation

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

city size rank size rule
City Size: Rank/Size Rule

City Population =

Largest City’s Population

Rank of City

  • Cities of similar size tend to be located apart from each other geographically

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

central place theory
Central Place Theory
  • Developed by German geographer August Losch
  • Problem of location on a Homogeneous “featureless plain”
  • The greater the economies of scale in industrial production, the fewer and further apart will be the optimal location pattern for the cities, all things being equal
  • The greater the transportation costs, the more numerous and closer together will be the cities

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

central place theory10
Central Place Theory
  • The city (service area) assumes hexagonal shape on a hexagonal plane (like a honeycomb)
  • Even spacing of cities – minimizes transportation costs

City

A

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

theory of urban hierarchy
Theory of Urban Hierarchy
  • Developed by German geographer Walter Christaller:

The optimal configuration of cities on the featureless plain includes an hierarchy in which “higher-order” cities are fewer and further apart than “lower-order” ones.

  • “Higher-order” cities: those containing functions which require more centralization
  • “Lower-order” cities: those containing functions which require less centralization
  • “Threshold Market”: minimum requirement to support an efficient production process

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

theory of urban hierarchy12
Theory of Urban Hierarchy
  • Traditional theory identifies seven “orders” of cities
  • Cities like New York, London, Tokyo, Hong Kong, Bangkok, Mexico City and a few others are seventh-order ones
  • Real estate terminology – “tiers” instead of “orders”
  • “Location theory”

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

dynamics of city growth
Dynamics of City Growth
  • The following factors influence the dynamics of city growth:

- Natural resources

- Industrial production

- Transportation facilities (land,

water, air)

- Government offices

- Financial services

- Cultural and Social factors

(entrepreneurial talent)

- Telecommunications

- Technological developments

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

projecting growth
Projecting Growth
  • Economic Base
  • “Export Sector” Jobs
  • “Service Sector” Jobs
  • Export Base theory:

Economic growth of the city or region is dependent entirely on growth in the export sector of the local economy

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

projecting growth location quotient
Projecting Growth: Location Quotient
  • “Location Quotient”:

- The LQ helps in figuring out what jobs are

part of the export sector.

- The LQ is defined as the proportion of

total local employment in a given

industry, divided by the proportion of total

national employment in that same industry

- Only when the LQ significantly exceeds 1.0

is the industry part of the export sector.

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

projecting growth multiplier effect
Projecting Growth: Multiplier Effect
  • The number of jobs in the service sector greatly exceeds the number of jobs in the export sector. As a result, expansion in the export sector creates a “multiplier effect” on total local employment
  • Employment Multiplier:

=

  • Population Multiplier:

=

Net Total Employment Increase

Export Employment Increase

Net Total Population Increase

Export Employment Increase

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

projecting growth multiplier effect17
Projecting Growth: Multiplier Effect
  • Typical Employment Multiplier ratios are in the range of 2.0 to 4.0
  • Typical Population Multiplier ratios range from 2.5 to 9.0
  • It is important to note that the multiplier effect goes both ways
  • To use the export based approach to economic analysis:

1. Analyze location quotients on SIC classified location quotients in an area

2. Forecast future employment prospects in each of these groups

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

economic base analysis
Economic Base analysis
  • Common trends among all MSAs
  • The large employer approach
  • Classification of cities
  • Relation between growth and returns for real-estate
  • Local investment as a catalyst of growth

- Local government role in local investment

- Social Infrastructure investment,

especially EDUCATION

  • Local demographics factor
  • Policies to limit growth or increase growth

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

future master planned community models
Future Master Planned Community Models
  • Emphasis on mixed-use where retail and residential and office and open spaces co-exist such that transportation cost is minimized and convenience maximized
  • Examples:

- Columbia, Maryland

- Celebration, Orlando

- Stapleton, Denver

- City Place, West Palm Beach

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

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“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner