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Chapter 14

Chapter 14. Understanding Real Estate Market Dynamics. 1. 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

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Chapter 14

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  1. Chapter 14 Understanding Real Estate Market Dynamics 1

  2. 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 2

  3. Demonstrating Market Dynamics • Figures: • 14.1 Supply/Demand Equilibrium • 14.2 Demand Changes Price • 14.3 Supply Changes Price • 14.4 Simultaneous Supply and Demand Changes • Example from Fort Lauderdale, Florida 3

  4. 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 at higher quantities. In a typical market, therefore, demand increases are unlikely to result in long-term price increases. Demand decreases, however, may lead to dramatic price decreases. 4

  5. 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) 5

  6. 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 6

  7. Retail Space Markets Freestanding retail Neighborhood center Community center Regional center Superregional center 7

  8. Industrial Space Markets Warehouse Manufacturing/Production Materials processing 8

  9. Agricultural Space Markets Annual (seasonal) cropland Perennial cropland Livestock grazing 9

  10. Lodging Space Market Highway motels Convention/business hotels Luxury hotels Resort (destination) hotels Extended stay hotels/motels 10

  11. 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” 11

  12. Real Estate Asset Market Transactions involving cash-flow rights to real estate See Figure 14.5 Major Types of Capital Asset Markets and Investment Products 12

  13. 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) 13

  14. Price Determinants in the Real Estate Assets Market Opportunity of cost capital Growth expectations Risk 14

  15. Tying Together Space & Assets Markets See Figure 14.6 The Real Estate System Prevailing economic conditions influence both capital and space markets Landlords and tenants negotiate rents, which produce cash flows of interest to the real estate asset market If cash flows are attractive more development is encouraged 15

  16. 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 16

  17. Market Analysis Inputs (continued) • 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 17

  18. 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. 18

  19. Professional Market Analysis Reports Office Lodging Industrial Apartments Owner-occupied residential 19

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