Chapter 2: Chapter 2dspace.mit.edu/bitstream/handle/1721.1/41057/11-431JFall... · 2019. 9. 12. ·...
Transcript of Chapter 2: Chapter 2dspace.mit.edu/bitstream/handle/1721.1/41057/11-431JFall... · 2019. 9. 12. ·...
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Chapter 2:Chapter 2:
The Real Estate System
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The Real Estate SystemThe 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.
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2.1 Development IndustryThe Commercial Property 2.1 The Commercial Property Development Industry
Financial Resources
Physical Resources
New Built
Space
Development Industry
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The Development IndustryThe Development Industry
Development is a creative, entrepreneurialprocess characterized by…
VisionGreed
CooperationRisk
(All the most entertaining features of American capitalism.)
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Development (cont.)…Development (cont.)… Cooperation: • Between public & private sectors;
• Between developers & financiers. Risk: • Even an economy in recession needs anexisting stock of built space.
• New space (need for development) resultsonly from economic growth &/or change.
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Development (cont.)…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…
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2.2 The Real Estate System2.2 The Real Estate System
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Exhibit 2-2: The “Real Estate System”: Interaction of the Space Market, Asset Market, & Development I ustryExhibit 2-2: The “Real Estate System”: Interaction of the Space Market, Asset Market, & Development Indndustry
SPACE MARKET
SUPPLY (Landlords)
DEMAND (Tenants)
RENTS &
OCCUPANCY
LOCAL &
NATIONAL ECONOMY
FORECAST FUTURE
ASSET MARKET
SUPPLY (Owners
Selling)
DEMAND (Investors Buying)
CASH FLOW
MKT REQ’D
CAP RATE
PROPERTY MARKET VALUE
DEVELOPMENT INDUSTRY
IS DEVELPT
PROFITABLE ?
CONSTR COST INCLU LAND
IF YES
ADDS NEW
CAPI TAL MKTS
= Causal flows.
= Information gathering & use.
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“Negative feedback loops”…
“Negative feedback loops”…
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.
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Example: Example: A thermostat puts a negative feedback loop into a
heating and cooling (HVAC) system in a building.
• When the temperature in the building getstoo low, the thermostat triggers the heater.
• When the temperature in the building getstoo high, the thermostat triggers the air conditioning.
The result is that the building temperature remains “under control”, within a comfortable temperature range.
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Concept check:Concept check:How do the development industry and the real estate
asset market work together to provide a (long-run) negative feedback loop in the Real EstateSystem?…
How can “forward-looking” behavior (goodforecasting of the space market) in thedevelopment industry and R.E. asset market(capital market) improve this negative feedbackloop?…
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2.3 The “4-Quadrant Model” (4QM)…2.3 The “4-Quadrant Model” (4QM)…
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Exhibit 2-3: The DiPasquale-Wheaton 4-Quadrant Diagram…Quadrant Diagram… Exhibit 2-3: The DiPasquale-Wheaton 4-
Rent $
Stock (SF)Price $
Construction (SF)
Space Market: Stock Adjustment
Asset Market: Construction
Space Market: Rent Determination
Asset Market: Valuation
Q*
R*
P*
C*
D
D
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2.4 Using the 4QM to help understand “boom & bust” cycles…2.4 Using the 4QM to help understand “boom & bust” cycles…
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EXHIBIT 7-10: THE "ROLLER COASTER RIDE" IN COMMERCIAL PROPERTY PRICES OVER THE LAST QUARTER-CENTURY . . .
EXHIBIT 7-10: THE "ROLLER COASTER RIDE" IN COMMERCIAL PROPERTY PRICES OVER THE LAST QUARTER-CENTURY . . .
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
Price Level Index U.S. Institutional Real Estate
REITs
REIT bust, Recession
ERISA: MPT =>P.F. demand
inflation fears
Boom, Tax incentives S&L Dereg
Overbuilding Tax reform
Disinflation
Recession S&L Crisis: FIRREA
Securitizatn: - REITs - CMBS
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Exhibit 2-4a: Demand Growth in Space Market:Effect of Exhibit 2-4a: Effect of Demand Growth in Space Market:
Rent $
Stock (SF)Price $
Construction (SF)
Space Market: Stock Adjustment
Asset Market: Construction
Space Market: Rent Determination
Asset Market: Valuation
Q*
R*
P*
C*
D0 D1
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Exhibit 2-4a: nd Growth in Space Market: First phase…Effect of DemaExhibit 2-4a: Effect of Demand Growth in Space Market: First phase…
Rent $
Stock (SF)Price $
Construction (SF)
Space Market: Stock Adjustment
Asset Market: Construction
Space Market: Rent Determination
Asset Market: Valuation
Q*
R*
P*
C*
D0 D1
R1
P1
Can this be a long-run equilibrium result?…
Doesn’t form a rectangle.
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Exhibit 2-4a: nd Growth in Space Market: LR Equilibrium…Effect of DemaExhibit 2-4a: Effect of Demand Growth in Space Market: LR Equilibrium…
Rent $
Stock (SF)Price $
Construction (SF)
Space Market: Stock Adjustment
Asset Market: Construction
Space Market: Rent Determination
Asset Market: Valuation
Q*
R*
P*
C*
D0 D1
R1
P1
R**
P**
C**
Q**
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Exhibit 2-4a: nd Growth in Space Market: LR Equilibrium…Effect of DemaExhibit 2-4a: Effect of Demand Growth in Space Market: LR Equilibrium…
Rent $
Stock (SF)Price $
Construction (SF)
Space Market: Stock Adjustment
Asset Market: Construction
Space Market: Rent Determination
Asset Market: Valuation
Q*
R*
P*
C*
D0 D1
R**
P**
C**
R1
P1
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Exhibit 2-4a: nd Growth in Asset Market…Effect of DemaExhibit 2-4a: Effect of Demand Growth in Asset Market…
Rent $
Stock (SF)Price $
Construction (SF)
Space Market: Stock Adjustment
Asset Market: Construction
Space Market: Rent Determination
Asset Market: Valuation
Q*
R*
P*
C*
11% OAR
8% OAR
D0
D1
P1
P**
R**
Q* *
C**
SR
LR
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EXHIBIT 7-10: THE "ROLLER COASTER RIDE" IN COMMERCIAL PROPERTY PRICES OVER THE LAST QUARTER-CENTURY . . .
EXHIBIT 7-10: THE "ROLLER COASTER RIDE" IN COMMERCIAL PROPERTY PRICES OVER THE LAST QUARTER-CENTURY . . .
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
Price Level Index U.S. Institutional Real Estate
REITs
REIT bust, Recession
ERISA: MPT =>P.F. demand
inflation fears
Boom, Tax incentives S&L Dereg
Overbuilding Tax reform
Disinflation
Recession S&L Crisis: FIRREA
Securitizatn: - REITs - CMBS
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Concept check…Concept check…
1. What does the 4Q Model reveal about the interaction of the space market, the assetmarket, and the development industry incausing “boom & bust” cycles?
2. How can the an understanding of the 4Q Modelhelp participants in the asset market anddevelopment industry to avoid “boom & bust”cycles? [Hint: Can the 4Q Model help with“forward-looking” decision-making?…]