Chapter 3 Central Cities and Regional Market Analysis

1. Chapter 3Central Cities and Regional Market Analysis “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

2. Major Topics • Why do cities exist? • Why do cities of different sizes exist? • What is a metropolitan statistical area? • What are the primary causes of city growth, stability or decline? • Possible prototypes for cities of the future “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

3. Why is city growth and decline important? • Understanding the causes will lead to better decisions of all types • > 90% of the value of US real estate is in urban and urbanizing areas • In the U.S., urban centers are very spread out “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

4. Key Terms • Central Cities • M.S.A.: “Metropolitan Statistical Area” >50,000 people • C.M.S.A.: “Consolidated M.S.A.” “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

5. Urbanized Land U.S. Census Bureau (www.census.gov) recognizes, as of 1998: • 340 MSAs in U.S.A., some of which are constituents of the 19 recognized CMSAs • Almost 80% of all U.S. residents reside in urbanized MSAs • MSAs constitute nearly 18% of total U.S. land area • “Urbanized” Land actually makes up less than 5% of the land area of U.S. “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

6. Essence of a “City” • A dense collection of inhabitants of relatively large population • Where none of the citizens make their living directly from agricultural activity • Where the social and economic relationships are relatively complex and hierarchical “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

7. “City-causing” phenomena • Economies of Scale • Economies of Agglomeration • Positive Locational Externalities • Fixed “break bulk” points and distribution centers - Centripetal Forces - Cumulative Causation “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

8. City Size: Rank/Size Rule City Population = Largest City’s Population Rank of City • Cities of similar size tend to be located apart from each other geographically “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

9. Central Place Theory • Developed by German geographer August Losch • Problem of location on a Homogeneous “featureless plain” • The greater the economies of scale in industrial production, the fewer and further apart will be the optimal location pattern for the cities, all things being equal • The greater the transportation costs, the more numerous and closer together will be the cities “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

10. Central Place Theory • The city (service area) assumes hexagonal shape on a hexagonal plane (like a honeycomb) • Even spacing of cities – minimizes transportation costs City A “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

11. Theory of Urban Hierarchy • Developed by German geographer Walter Christaller: The optimal configuration of cities on the featureless plain includes an hierarchy in which “higher-order” cities are fewer and further apart than “lower-order” ones. • “Higher-order” cities: those containing functions which require more centralization • “Lower-order” cities: those containing functions which require less centralization • “Threshold Market”: minimum requirement to support an efficient production process “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

12. Theory of Urban Hierarchy • Traditional theory identifies seven “orders” of cities • Cities like New York, London, Tokyo, Hong Kong, Bangkok, Mexico City and a few others are seventh-order ones • Real estate terminology – “tiers” instead of “orders” • “Location theory” “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

13. Dynamics of City Growth • The following factors influence the dynamics of city growth: - Natural resources - Industrial production - Transportation facilities (land, water, air) - Government offices - Financial services - Cultural and Social factors (entrepreneurial talent) - Telecommunications - Technological developments “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

14. Projecting Growth • Economic Base • “Export Sector” Jobs • “Service Sector” Jobs • Export Base theory: Economic growth of the city or region is dependent entirely on growth in the export sector of the local economy “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

15. Projecting Growth: Location Quotient • “Location Quotient”: - The LQ helps in figuring out what jobs are part of the export sector. - The LQ is defined as the proportion of total local employment in a given industry, divided by the proportion of total national employment in that same industry - Only when the LQ significantly exceeds 1.0 is the industry part of the export sector. “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

16. Projecting Growth: Multiplier Effect • The number of jobs in the service sector greatly exceeds the number of jobs in the export sector. As a result, expansion in the export sector creates a “multiplier effect” on total local employment • Employment Multiplier: = • Population Multiplier: = Net Total Employment Increase Export Employment Increase Net Total Population Increase Export Employment Increase “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

17. Projecting Growth: Multiplier Effect • Typical Employment Multiplier ratios are in the range of 2.0 to 4.0 • Typical Population Multiplier ratios range from 2.5 to 9.0 • It is important to note that the multiplier effect goes both ways • To use the export based approach to economic analysis: 1. Analyze location quotients on SIC classified location quotients in an area 2. Forecast future employment prospects in each of these groups “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

18. Economic Base analysis • Common trends among all MSAs • The large employer approach • Classification of cities • Relation between growth and returns for real-estate • Local investment as a catalyst of growth - Local government role in local investment - Social Infrastructure investment, especially EDUCATION • Local demographics factor • Policies to limit growth or increase growth “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

19. Future Master Planned Community Models • Emphasis on mixed-use where retail and residential and office and open spaces co-exist such that transportation cost is minimized and convenience maximized • Examples: - Columbia, Maryland - Celebration, Orlando - Stapleton, Denver - City Place, West Palm Beach “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

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