Real Estate Market Dynamics

  • 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
    • Demonstrating Market Dynamics
      • 1 Supply/Demand Equilibrium
      • 2 Demand Changes Price
      • 3 Supply Changes Price
      • 4 Simultaneous Supply and Demand Changes
      • Example from Fort Lauderdale, Florida
    • 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.
  • 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)
  • 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
  • Retail Space Markets
    • Freestanding retail
    • Neighborhood center
    • Community center
    • Regional center
    • Superregional center
  • Industrial Space Markets
    • Warehouse
    • Manufacturing/Production
    • Materials processing
  • Agricultural Space Markets
    • Annual (seasonal) cropland
    • Perennial cropland
    • Livestock grazing
  • Lodging Space Market
    • Highway motels
    • Convention/business hotels
    • Luxury hotels
    • Resort (destination) hotels
    • Extended stay hotels/motels
  • 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”
  • 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
    • The real estate asset market is part of the broader capital asset 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)
    • Price Determinants in the Real Estate Asset Market
      • Opportunity of cost capital
      • Growth expectations
      • Risk
  • 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 in space markets, which produce cash flows to the real estate asset market
    • 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.
  • 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
      • 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
    • 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.
      • Professional Market Analysis Reports
        • Office
        • Lodging
        • Industrial
        • Apartments
        • Owner-occupied residential