MIT Center for Real Estate Week 1:...
Transcript of MIT Center for Real Estate Week 1:...
enter for Real EMIT C state
Week 1: Introduction
• The space versus asset market: 4 Quadrant math.
• Real Estate Micro Economics: Hedonics, Location, density, government regulations.
• Real Estate Macro Economics: timing behavior (search, moving, contracts), cycles, regional growth.
MIT Center for Real Estate
The Role of Real Estate in the Economy
• Construction [6% of GDP]• Service flow, “Shelter”, rent plus imputed
rent [20% + of GDP] • Assets [55-60% of total national wealth]• Land? Not part of GDP (we don’t make
land), but it is part of wealth. • Accounting, measurement difficulties [book
versus market value]
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Construction as a part of GDP
MIT C state
(1990)$, in billions % of GDP
Private Construction 338 6.1 Public Construction
Buildings 301 5.5 Buildings
Residential Buildings 183 3.3 Housing and Development
Nonresidential Buildings 118 2.1 Industrial
Industrial 24 0.4 Other
Office 29 0.5
Hotels/Motels 10 0.2 Nonbuilding Construction
Other Commercial 34 0.6 Infrastructure
All Other Nonresidential 21 0.4 All Other
Nonbuilding Construction 37 0.7 Total New Construction
Public Utilities 31 0.6
All Other 6 0.1 Total GDP
$, in billions % of GDP
109 2.0
46 0.8
4 0.1
1 0.0
41 0.7
63 1.1
55 1.0
8 0.1
446 8.1
5,514 100.0
Adapted from DiPasquale and Wheaton (1996)
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The Value of US Real Estate Assets (1990)
$, in billions % of Total
Residential 6,122 69.8
Single Family Homes 5,419 61.7
Multifamily 552 6.3
Condominiums/Coops 96 1.1
Mobile Homes 55 0.6
Nonresidential 2,655 30.2
Retail 1,115 12.7
Office 1,009 11.5
Manufacturing 308 3.5
Warehouse 223 2.5
Total U.S. Real Estate 8,777 100.0
Adapted from DiPasquale and Wheaton (1996)
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Ownership, 1990
All Real Estate Residential Only Nonresidential Only
$, in billions % $, in billions % $, in billions %
Individuals 5,088 58.0 5,071 82.8 17 0.6
Corporations 1,699 19.4 66 1.1 1,633 61.5
Partnerships 1,011 11.5 673 11.0 338 12.7
Nonprofits 411 4.7 104 1.7 307 11.6
Government 234 2.6 173 2.8 61 2.3
Institutional Investors 128 1.5 14 0.2 114 4.3
Financial Institutions 114 1.3 13 0.2 101 3.8
Other (Including Foreign 92 1.0 8 0.1 84 3.2
Total: 8,777 100.0 6,122 100.0 2,655 100.0
% of All Real Estate 100.0 69.8 30.2
Adapted from DiPasquale and Wheaton (1996)
Exhibit 2-3: The DiPasquale-Wheaton 4-Quadrant Diagram…
Rent $
Stock (SF)Price $
Space Market:Construction
Space Market:
Valuation
Q*
R*
P*
C*
D
D
Construction (SF)
Stock Adjustment
Asset Market:
Rent Determination Asset Market:
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Systems of Economic Equations• Parameters: Constants that reflect underlying
behavior, α, β, δ. • Endogenous variables: values that the model
“determines: C, S, R, P. • Exogenous variables: values that determine the
model’s variables, but which the models variables in turn do not influence: i, E.
• Equilibrium: Solution to the endogenous variables given exogenous values and parameters.
• Comparative Statics: How changes in exogenous variables change equilibrium endogenous ones.
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1st quadrant
β
1). Office Demand = α1ER-β1
E= office employment R = rent per square foot
1 = rental elasticity of demand: [%change in sqft per worker/% change in rent]
2). Demand = Stock = S 3). Hence: R = (S/α1E)–1/ β1
MIT Center for Real Estate
2nd and 3rd Quadrants 4). P = R/i
i = all inclusive cap rate 5). Office Construction rate:
C/S = α2Pβ2
P = Asset Price per square foot [“Q” theory?] β2 = Price elasticity of supply: [% change in construction rate/% change in rent]
MIT Center for Real Estate
4th Quadrant 6). Replacement version:
E= fixed C= δS [Construction equals depreciation (δ is depreciation rate)]
7). Steady Demand growth version: ∆E/E = δ
Hence: C= δS [what if S grows less or more than E?]
Exhibit 2Exhibit 2--4a: Effect of4a: Effect of Demand GrowthDemand Growth in Space Market: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
Exhibit 2Exhibit 2--4a: Effect of Demand Growth in Space Market:4a: Effect of Demand Growth in Space Market: First phaseFirst 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.
Exhibit 2Exhibit 2--4a: Effect of Demand Growth in Space Market:4a: Effect of Demand Growth in Space Market: LR EquilibriumLR 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**
Exhibit 2Exhibit 2--4a: Effect of Demand Growth in Space Market:4a: Effect of Demand Growth in Space Market: LR EquilibriumLR 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
Exhibit 2Exhibit 2--4a: Effect of Demand Growth in4a: Effect of Demand Growth in AssetAsset MarketMarket……
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
MIT Center for Real Estate
Using the 4-Quadrant Model to assess the impact of other
changes. • What happens if Construction costs rise or the
supply schedule shifts? • Suppose depreciation speeds up (functional
obsolescence dictates shorter life spans of buildings)?
• How to interpret owner occupied space (e.g. SFU housing)?
• EXERCISE #1.
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National Office ForecastCompletions Rate vs. Real Rent
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
20.00
22.00
24.00
26.00
28.00
30.00
32.00
34.00
$ Per Sqft
Forecast
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Total Employment Growth (L) Real Rent (R) Completion Rate (L)
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National Industrial Forecast$ Per Sqft
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
Completions Rate vs. Real Rent Forecast
7.00
6.50
6.00
5.50
5.00
4.50
4.00
3.50
3.00
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Total Employment Growth (L) Real Rent (R) Completion Rate (L)
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National Multi-Housing Forecast MIT C state
$ Per Sqft Permits vs. Real Rent
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
500.00
550.00
600.00
650.00
700.00
750.00
Forecast
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Total Employment Growth (L) Real Rent (R) Completion Rate (L)
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7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
Completion Rate vs. Real Rent Forecast
National Retail Forecast $ Per Sqft
24.00
23.00
22.00
21.00
20.00
19.00
18.00
17.00
16.00
15.00
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Total Employment Growth (L) Real Rent (R) Completion Rate (L)
enter for Real EMIT C state National Hotel Forecast
Supply Growth Rate vs. Real ADR
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
80.00
85.00
90.00
95.00
100.00
105.00
110.00
Forecast
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total Employment Growth (L) Real ADR (R) Supply Growth Rate (L)
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U.S. Single-Family MarketCompletions Rate vs. Home Price
Appreciation 1990-91 1980-81
7% 6%
5% 4% 3%
2% 1% 0%
-1% -2% -3%
-4% -5%
2001-02
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
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1989
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1991
1992
1993
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1995
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1999
2000
2001
2002
Completions Rate Employment Growth Home Price Index (2002 $)
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The Historic Supply of US Office Space Broken
Ground
18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
-2%
ProjectsConstruction as % of Stock
1901 1910 1919 1928 1937 1946 1955 1964 1973 1982 1991 2000
Downtown Suburban
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Index of Historic Housing Prices in MIT C
Amsterdam (Real Guilders)g y ( g )
0
50
10 0
15 0
20 0
25 0
30 0
35 0
40 0
Pric
e In
dex
16481658166816781688169817081718172817381748175817681778178817981808181818281838184818581868187818881898190819181928193819481958
Y ear
16281638
1968
MIT Center for Real Estate
Real Estate Micro-economics: Cities and Land Markets
• No two properties are identical [complete product differentiation]
• Properties are close if not perfect substitutes for each other – at some price differential.
• Price differentials are extremely large, and very predictable.
• Price differentials tend to be stable over time: local neighborhoods do not have independent cyclic movements.
enter for Real EHouse prices reflect both unit characteristics and
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location attributes
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Repeat-Sale House price indices (CSW) for 15 submarkets within the greater Boston CMSA: 1982-2002
House Price Indexes, Eastern Massachusetts, by City/Town Location
0
50
Pric
e In
dex
(199
0=10
0)
Lowell Area
i
100
150
200
250
300
Boston Southeast W estern 1 Far North Shore 495 North 95 South 95 North W estern 2
495 West North Shore South Shore Worcester Area Cambr dge Area North Central
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Year
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Home Prices within South California
$400
$350
$300
$250
$200
$150
$100
Median Home Price, Thousands ($ 2002.4)
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Los Angeles Orange County Riverside Ventura San Diego Sources: OFHEO, Torto Wheaton Research
MIT Center for Real Estate
Forecast
15
20
25
30
35
40
1980
1981
1982
1983
1985
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Los Angeles Orange County Ventura County Riverside San Diego
Office Rents Move together Cyclically but notOffice Rents Move together Cyclically but not always secularlyalways secularly
TW Rent Index, 2003$ per sqft
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Closely Correlated Industrial RentClosely Correlated Industrial Rent Movements: few secular differencesMovements: few secular differences
TW Rent Index, 2003$ per sqft 10.00
9.00
8.00
7.00
6.00
5.00
4.00
Forecast
1980
1981
1983
1984
1986
1987
1989
1990
1992
1993
1995
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1998
1999
2001
2002
2004
2005
Los Angeles Orange County Ventura County Riverside San Diego
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25
30
35
40
45
50
55
60
65
Manhattan Office Rents vs. NJ and Conn. Suburbs
TW Index, $2002 per sqft
1980
1981
1982
1983
1985
1986
1987
1988
1990
1991
1992
1993
1995
1996
1997
1998
2000
2001
Suburban Markets Manhattan
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15
20
25
30
35
40
45
50
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1981
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Office Suburban Rents in Detail MIT C state
Northern New Jersey Long Island Stamford Westchester
TW Index, $2002 per sqft
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Prices and Development• Prices bring forth development: of any urban land
use.. • Development occurs so as to maximize the
residual value between: Price-capital costs (construction).
• This residual is “land value”. Development maximizes land value.
• Land Development is a natural real option: incur heavy capital costs to realize an income stream – or- wait (to do the same later) ?
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What is a real Estate Market?
• Within “markets” all properties should move together: high substitutability, easy mobility.
• Between markets there exists frictions, transportation costs, immobility of resources and low substitutability.
• MSA as “market”? CMSA?
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Metropolitan Housing Markets often move independently
$)
50
70
90
110
130
150
170
190
210
230
250
Hou
se P
rice
F IGURE 5. Repeat Sale House Price Indices for Selected "new " Cities: 1975-1999 (constant
Year
75
176
1
77
178
19
79
1980
19
1 19
2 83
184
1
85
186
19
87
1988
19
89
190
191 92
1
93
194
1
95
1996
19
97
1998
1
8 8 9 99 9 19 9 9 9 19 9 9 9
l l ixAt anta Dennver Houston Los Ange es Phoen
19 9 999
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Metropolitan Housing Markets have some similar movements
50
70
90
Hou
se P
rice
(
110
130
150
170
190
210
230
250
Year
FIGURE 4. Repeat Sale House Price Indices for Selected "Traditional" Cities: 1975-1999 constant $)
761
771
7819
79 980
981
1982
1983 98
419
851
861
871
8819
89 990
991
1992 99
3
994
1995
1996
197
198
19 9 9 9 9 9 9 91 1 1 1 1 1 1
Chi iBoston cago New York Sanfrancisco W ash ngton D.C.
1975
1 999