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Chapter 2 What drives Real Estate Markets?. “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner. Major Topics. Real Estate economic and market terms How Real Estate markets differ from other asset markets How capital markets influence space markets

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Chapter 2 what drives real estate markets
Chapter 2What drives Real Estate Markets?

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


Major topics
Major Topics

  • Real Estate economic and market terms

  • How Real Estate markets differ from other asset markets

  • How capital markets influence space markets

  • Short term and longer-term real estate demand drivers

  • Key demand and supply drivers by property type

  • Sources of data for market analysis

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


Key terms
Key Terms

  • Price

  • Rent

  • ‘Subject’ property

  • Submarket

  • Space Segmentation

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


Influences upon rent prices
Influences upon Rent & Prices

  • Macro factors:

    • Global influences

    • National influences

  • Micro factors

    • Local submarket

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


Rents and prices real estate demand curve
Rents and Prices: Real Estate Demand Curve

Price

or Rent

As Price Decreases,

Quantity Demanded Increases

& vice versa

Quantity

or Space

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


Short run long run supply curves
Short Run & Long Run Supply Curves

Price

or Rent

Short Run

Supply Curve

Long Run Supply Curve

Quantity

or Space

Long Run Supply Curve is more Elastic

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


Kinked supply curve
Kinked Supply Curve

Price

or Rent

Supply is added when Price is above Pe

Pe

Quantity

or Space

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


Uniqueness of real estate markets real estate vs perfectly competitive markets
Uniqueness of Real Estate Markets:Real Estate vs. Perfectly Competitive Markets

  • Durability

  • Large (Lumpy) Economic Unit

  • Information is costly

  • Transaction Costs

  • Unique Location and Heterogeneity

  • Government Intervention

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


Market analysis and time
Market Analysis and Time

  • Short Run: Less than one year

  • Intermediate: 2-3 years

  • Long Run: 4-5 years and longer

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


Market analysis and time1
Market Analysis and Time

  • Short Run:

    • Supply viewed as essentially fixed

    • Extreme “seasonality” especially in residential markets

    • Interest Rates

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


Market analysis and time2
Market Analysis and Time

  • Intermediate to Long Run:

    • Employment Trends

    • Will export base employment be main driver of regional growth?

    • Regional Demographic Trends

    • Supply Constraints

    • Regional Transportation Costs

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


Direction of rent prices
Direction of Rent & Prices

  • We have no choice but to forecast the future.

  • However, there is enough disagreement over the exact rental rate trend which creates opportunities for people

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


Connection between capital markets physical markets
Connection Between Capital Markets & Physical Markets

  • Interest Rates

  • Capital Availability

  • The importance of local real estate fundamentals

  • Capital driven business decisions often ignore the supply demand equation - hence can be very risky

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


Space asset market
Space & Asset Market

Space Market

Local Regional National Global Economy and Trends

Supply Landlords

Demand Tenants

Occupancy and Rents

New Construction

Asset Market

Market Required Rate of Return given Risk Profile

Cash Flow Pro-Forma

Development Industry

Owners Sellers

YES

Profitable?

Cost Including Land

Property Value

Investors Buyers

NO

Capital Markets

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


Inevitable real estate cycles
Inevitable Real Estate Cycles

  • Characteristics of Real Estate that leads to cycles:

    • Large economic and physical size

    • Need for debt

    • Government regulation

Typical Real Estate Cycle

Construction begins and accelerates as you move up the curve while vacancy continues to decline

Vacancy increases yet construction continues unable to stop

Vacancy increases at a decreasing rate, some construction

Vacancy declining and no construction

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


The internet transport cost and real estate markets
The Internet, Transport Cost and Real Estate Markets

  • Growth of internet:

    • “Death of distance?”

    • “Location, Location, Location”?

  • Implications?

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


Market analysis
Market Analysis

  • Determine Dominant Demand Drivers for specific property type

  • Determine Dominant Supply Drivers for specific property type

  • Property Types:

    • Residential Single Family

    • Residential Multifamily

    • Industrial

    • Office

    • Retail

    • Hotels

    • Parking Lots

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


Sources of demand data note web sites may have changed
Sources of Demand DataNote: web sites may have changed.

  • www.worldchambers.com/america.html

  • www.inrealty.com

  • www.ired.com

  • www.pikenet.com

  • www.reisreports.com

  • www.COSTARGROUP.com

  • Government and Trade Associations:

    • http://www.realestate.uc.edu/TRADES/tradeassc.html

    • http://www.realestate.uc.edu/Government/usgov.html

  • Lend Lease Real Estate Investments

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


Sources of demand data note web sites may have changed1
Sources of Demand DataNote: web sites may have changed.

  • Building Permit data:

    • www.mag.fwdodge.com/index.htm

  • Current Market Information:

    • www.mmreibc.com

    • www.grubb-ellis.com

    • www.cbrichardellis.com

    • www.colliers.com

    • www.naiweb.com

    • www.staubach.com

    • www.corenetwork.com

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


Chapter 2 what drives real estate markets
END

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