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

Influences upon Rent & Prices Macro factors: Global influences National influences Micro factors Local submarket “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

Rents and Prices: Real Estate Demand Curve or Rent As Price Decreases, Quantity Demanded Increases & vice versa Quantity or Space “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

Short Run & Long Run Supply Curves Price or Rent Short Run Supply Curve Long Run Supply Curve Quantity or Space Long Run Supply Curve is more Elastic “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

Supply is added when Price is above Pe Kinked Supply Curve Price or Rent Supply is added when Price is above Pe Pe Quantity or Space “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

Uniqueness of Real Estate Markets: Real Estate vs 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 Space Market Local Regional National Global Economy and Trends Supply Landlords Demand Tenants Occupancy and Rents New Construction Asset Market Market Required Rate of Return given Risk Profile Cash Flow Pro-Forma Development Industry Owners Sellers YES Profitable? Cost Including Land Property Value Investors Buyers NO Capital Markets “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

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 Cycle Construction begins and accelerates as you move up the curve while vacancy continues to decline Vacancy increases yet construction continues unable to stop Vacancy increases at a decreasing rate, some construction Vacancy declining and no 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 Data Note: 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 Data Note: 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

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