Driving Forces of Real Estate Markets Lecture 1 Driving Forces of Real Estate Markets

“Markets” “Mechanism through which all goods and services are voluntarily exchanged among different owners” Through price, markets allocate scarce resources among competing uses. Real Estate Submarket: “Property within a certain price and quality range and within specified geographic areas that potential tenants or potential buyers would consider as alternatives when looking at a Subject Property”

Rental Rates and Prices Single-Family, Owner-Occupied Market General Price Trends Long-term benefits Corporate World (long-term tenancy) Minimizing long-term occupancy costs Rent Investment World Rental trends AND Price Trends

Significant Influences on Rents and Prices Global Influences Exchange Rates, Recessions, National Disaster National Influences Tax Laws, Interest Rates Local Influences Employment Trends, Social Patterns, Changes in Development

Supply & Demand SUPPLY = SELLERS / LANDLORDS / AVAILABLE REAL ESTATE DEMAND = BUYERS / TENANTS

Demand Curve Price/Rent As price decreases, quantity demanded increases Quantity of Space

Short-Run Supply Curve Price/Rent Reflects inelasticity in a Short-Run market Quantity of Space

Long-Run Supply Curve Price/Rent Reflects more elasticity in a Long-Run Market Quantity of Space

Kinked Long-Run Supply Curve Price/Rent When price is above Pe, new supply will enter the market Pe Quantity of Space

Characteristics of Real Estate Markets Durability Inelastic short-run supply “Lumpy and Large” Economic Unit Infrequent Purchase Highly-levered industry Large shifts in supply within localized markets Costly Information Data not easily available Costs of Market Studies and Appraisals Search Costs

Characteristics of Real Estate Markets High Transaction Costs Title Insurance, Broker Fees, Lending Fees, Inspections/Due Diligence, Surveys, Endorsements, etc. Fixed Location Allows Real Estate to be Substitutable Heterogeneity Creates greater costs for market information and searching Government Regulated Limits Real Estate Use Can help or deter real estate use and value

Short-Run Market Analysis Lecture 1 Short-Run Market Analysis

Seasonality: Residential Home Sales Average Monthly Sales Springtime housing sales tend to run 40% higher than in December 120% 100% 80% 60% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Intermediate and Long-Run Market Analysis Lecture 1 Intermediate and Long-Run Market Analysis

Economic Base Analysis Export Sector: Employment bringing revenues into a region (i.e.: manufacturers of any product that serves more than the local population and brings revenues into the local region from outside) Multiplier Effect: New workers in an economy creating/causing even more jobs in different submarkets Service Sector: Employment geared toward serving the local population

Factors Affecting Growth Regional Demographic Trends Birth rates, death rates, size of households, income trends gender, education, social patterns, etc. Regional Supply Constraints Physical: Lakes, topography, wetlands, etc. Social: Politics, local planning/zoning boards, growth goals, etc. Regional Transportation Costs Public Transit Systems (bus, rail, etc) Linkage Urban Sprawl

The Internet and Real Estate Location-Free Workers Work Space and Living Space accomodating workers E-Commerce threat to the Retail Real Estate Submarket Warehousing