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Chapter 8: Commercial Property Markets

Chapter 8: Commercial Property Markets. Property Types Residential Single-family Multi-family Nonresidential Commercial (office) Retail Industrial Hotel Recreational Institutional. Regional Eco. Influences. Regional comparative advantage. Eco. Base Industries Location Quotient:

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Chapter 8: Commercial Property Markets

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  1. Chapter 8: Commercial Property Markets Property Types • Residential • Single-family • Multi-family • Nonresidential • Commercial (office) • Retail • Industrial • Hotel • Recreational • Institutional

  2. Regional Eco. Influences • Regional comparative advantage. • Eco. Base Industries • Location Quotient: • LQ = [R(j)/R(total)]/[N(j)/N(total)] < = > 1.0 • If LQ > 1, then concentration in industry j • Example: Triad Mfg. • LQ(m) = (143.8/663.6)/(17,161/131,431) = 1.65 • The Triad is concentrated in Mfg. Industries.

  3. Determinants of Rent • Supply, Demand, & the Natural Vac. Rate • Average 2-Bedroom Apt. Rents: • Asheville 566 • Charlotte 678 • Greensboro 578 • Hickory 513 • Raleigh 777 • Wilmington 633

  4. Income Approach Again Value = NOI / ( r – g) Capitalization Rate = (r – g) r = required return (reflects opportunity cost) g = growth in NOI NOI = before tax cash flow (here we ignore taxes and financing considerations, assuming the project is a 100% cash deal. Beginning Cap. Rate = rate in year 0. Ending (terminal) Cap. Rate = rate in the last year.

  5. Separating Value into Mortgage & Equity Interests • Value of Property = Present value of expected NOI • Value of Mortgage = Present Value of Mortgage Payments • Value of Equity = No. 1 – No. 2

  6. Calculation of Holding Period Return: Total Return = Income + Capital Appreciation TimeNOIValue Yr. 0 n.a. 100 Yr. 1 10 105 Total Return = 10/100 + 5/100 = 15% For Historic Returns: See www.NCREIF.com National Council of Real Estate Investment Fiduciaries

  7. Historic Return Averages • NCREIF Index has averaged 9.7%, 1978-2000 • Std. Deviation = 6.6% • These returns represent un-leveraged averages, actual leveraged returns could be much different.

  8. NAREIT Returns (www.Nareit.org) NAREIT Equity Index Return Components PeriodTotal PriceIncomeYield 1995 15.27 6.56 8.71 7.37 1996 35.27 26.35 8.92 6.05 1997 20.26 13.33 6.93 5.48 1998 -17.50 -22.33 4.83 7.47 1999 -4.62 -12.21 7.59 8.70 2000 26.37 16.51 9.86 7.52 2001 13.93 5.85 8.08 7.14

  9. Homework Problems: 8-1, 8-2, 8-3 (on page 249)

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