1. Real Estate Principles, 11th Edition
By Charles F. Floyd
and Marcus T. Allen

2. Understanding Real Estate Market Dynamics
Chapter 13
Understanding Real Estate Market Dynamics

3. Owner-Occupied Residential Real Estate Markets
Basic supply/demand equilibrium model
Supply – amount or quantity of the good or service that will be offered at various prices
Demand – amount or quantity of the good or service that will be desired at various prices
Equilibrium – the price/quantity combination at which quantity demanded equals quantity supplied

4. Demonstrating Market Dynamics
Figures:
13.1 Supply/Demand Equilibrium
13.2 Demand Changes Price
13.3 Supply Changes Price
13.4 Simultaneous Supply and Demand Changes
Example from Fort Lauderdale, Florida

5. Price Movements in Real Estate Space Markets
The demand curve in real estate markets is downward-sloping.
The supply curve in most real estate markets is vertical at the current quantity of space and horizontal or rising at higher quantities.
In a market with a horizontal supply curve, therefore, demand increases will not result in long-term price increases. Demand decreases, however, may lead to dramatic price decreases.

6. Commercial Real Estate Space Markets
Transactions for the rights to use land and buildings
People, firms, and other entities are willing to pay various prices for the use of space for consumption or production purposes (demand)
Owners of space are willing to sell the rights to use such space to the users for various prices (supply)

7. Office Space Markets Class A highest rent per square foot
Class B very desirable but lack attributes necessary to charge top dollar
Class C physically acceptable but not many amenities
Class D few amenities and poor location

8. Retail Space Markets Freestanding retail Neighborhood center
Community center
Regional center
Superregional center

9. Industrial Space Markets
Warehouse
Manufacturing/Production
Materials processing

10. Agricultural Space Markets
Annual (seasonal) cropland
Perennial cropland
Livestock grazing

11. Lodging Space Market Highway motels Convention/business hotels
Luxury hotels
Resort (destination) hotels
Extended stay hotels/motels

12. Residential Space Market
Single-family detached homes
Single-family attached homes
Manufactured homes
Multifamily apartments
See Close-Up “The Electronic Revolution’s Impact on the Value of Location”

13. Real Estate Asset Market
Transactions involving cash-flow rights to real estate
See Figure 13.5 Major Types of Capital Asset Markets and Investment Products

14. The Larger Market
The real estate asset market is part of a larger market:
Publicly traded equity assets (stocks, mutual funds, real estate investment trusts)
Privately traded equity assets (real property, private companies, oil and gas partnerships)
Publicly traded debt assets (bonds, mortgage-backed securities, money instruments)
Privately traded debt assets (bank loans, whole mortgages, venture debt)

15. Price Determinants in the Real Estate Assets Market
Opportunity of cost capital
Growth expectations
Risk

16. Tying Together Space & Assets Markets
See Figure 13.6 The Real Estate System
Prevailing economic conditions influence both capital and space markets
Landlords and tenants negotiate rents, which produce cash flows to the real estate asset market

17. Tying Together Space & Assets Markets, cont.
Property owners/investors in the asset market determine the present value of the cash flows (that is, the value of the property).
If property values are greater than or equal to cost of production (which includes reasonable profit for the developer), developers build new space.

18. Commercial Real Estate Market Analysis
Examination of the supply and demand sides of a real estate space market and the balance (equilibrium) between them
Inputs to market analysis
Vacancy rate – higher vacancy rate indicates less demand relative to supply and vice versa
Rent or price level – trends in rents and prices indicate changes in the balance between supply and demand

19. Commercial Real Estate Market Analysis, cont.
Inputs to market analysis, cont.
Quantity of new construction started – indicates new supply that will be coming into the market
Quantity of new construction completed – indicates new supply that is just arriving into the market
Absorption of new space – indicates the rate at which new supply is becoming occupied in the market

20. Using Market Analysis to Look Forward
“Months Supply”
Months supply = (vacant space + space in construction)/net absorption per month
If months supply is much greater than construction time for new projects, then the new project will likely hit the market at a time when supply exceeds demand
If months supply is equal to or less than construction time for new projects, then a new project will likely be well-received by the market.

21. Professional Market Analysis Reports
Office
Lodging
Industrial
Apartments
Owner-occupied residential