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 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

Price Rent ‘Subject’ property Submarket Space Segmentation

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

Macro factors: – Global influences– National influences

Micro factors– Local submarket

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

Influences upon Rent & Prices

Rents and Prices: Real Estate Demand Curve

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

Quantity or Space

Price or Rent

As Price Decreases, Quantity Demanded

Increases& vice versa

Short Run & Long Run Supply Curves

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

Quantity or Space

Price or Rent Short Run

Supply Curve

Long Run Supply Curve

Long Run Supply Curve is more Elastic

Kinked Supply Curve

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

Quantity or Space

Price or Rent

Supply is added

when Price is above Pe

Pe

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

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 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 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

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

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

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

Capital Markets

Cash Flow Pro-Forma

Property Value

Market Required Rate of Return given Risk

Profile

Owners Sellers

Investors Buyers

Local Regional National Global

Economy and Trends

Supply Landlords

Demand Tenants

Occupancy and Rents

New Construction

Cost Including

Land

Profitable?

NO

YES

Asset Market

Space Market

Development Industry

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 CycleConstruction begins and accelerates as you move up the

curve while vacancy continues to decline

Vacancy declining and no

construction

Vacancy increases yet construction continues unable

to stop

Vacancy increases at a decreasing rate, some

construction

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

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

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 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 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

END

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