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I Get Around: Real Estate, Development Plans and Transportation

I Get Around: Real Estate, Development Plans and Transportation. Dr Matthew F Gebhardt October 18, 2013 Housing Land Advocates Conference. Agenda. Supply and Demand and Housing Markets Assessment of Risk and Decision to Develop Portland’s Rental Market. Supply and Demand. Supply.

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I Get Around: Real Estate, Development Plans and Transportation

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  1. I Get Around: Real Estate, Development Plans and Transportation Dr Matthew F Gebhardt October 18, 2013 Housing Land Advocates Conference

  2. Agenda • Supply and Demand and Housing Markets • Assessment of Risk and Decision to Develop • Portland’s Rental Market

  3. Supply and Demand

  4. Supply Price S2 S0 S1 Decrease Increase O Quantity

  5. Demand Price D2 D0 D1 Decrease Increase O Quantity

  6. i h Supply and Demand Price S1 S2 Pe2 j Pe3 g Pe1 D2 D1 O Qe2 Qe1 Quantity Qe3

  7. Elasticity of Supply P D0 D1 Pe2 S0 S0 P D0 D1 Pe2 Pe1 Pe1 Qe1 Qe2 Qe1 Qe2 O Q O Q

  8. Function of Housing Markets • Demand for housing depends on a wide variety of factors • Demand is determined by income, availability of substitutes and availability of complementary goods, rate of household formation, rate of mortgage interest, current housing price • Major factor in increased demand in Portland Metro Area is due to population growth, primarily from migration

  9. Function of Housing Markets • Demand for housing is also extremely complex and fragmented • Big or small, near schools or near work, in Portland or Beaverton, buy or rent, old or new • Or maybe it’s simple: location, location, location

  10. Bid-Rent Rent/Price Distance from Center

  11. Function of Housing Markets • Supply is also based on a wide variety of factors • Price levels in the recent past (1-2 year lag) • Interest rates • Land available for housing with proper zoning • Construction costs • Speculative housing construction can have an effect

  12. Function of Housing Markets • Housing markets do not function efficiently • Imperfect information • High search and transaction costs • Stock variation • Tend to be highly localized • Many submarkets • Prone to fluctuations

  13. Assessment of Risk Net Operating Income/Costs

  14. Net Operating Income Income after normal operating expenses have been deducted, but before non-operating expenses and debt service. Calculation: Potential Gross Income - Vacancy and Concession Allowance Effective Gross Income - Operating Expenses Net Operating Income

  15. Construction Cost Estimates • Land • Site preparation • Infrastructure • Hard Costs • Labor • Materials • Soft Costs • Marketing • Operating • Legal fees • Accounting costs • Inspection costs • Overhead/administration • Insurance • Taxes • Consultants • Contingencies • Development fees

  16. Develop or Not? • Comparison of expected NOI from the property to the cost of developing the property • If expected NOI is too low or costs are too high the perceived risk of the project may be deemed too great to proceed • Even if developer is willing to accept a lower return

  17. Construction Costs ($s) Net Op. Inc.

  18. Develop or Not? • Lower rents (lower NOI) or higher costs can make risk of undertaking development greater • Equation can be changed through increasing NOI through: • More total units (higher densities – although this increases costs) • Mixing or changing the mix of units (more market rate) • Subsidizing rents

  19. Develop or Not? • It can also be changed by lowering costsincluding: • Soft costs (design, entitlements) • Finance costs (interest rates, more equity) • Labor costs (non-union labor) • Land costs (discounted land) • Material costs (lower level finishes, smaller units) • Of course, perception also plays a part

  20. Portland Market In Brief

  21. Housing Affordability • Affordability • Defined as ability or inability to gain access to housing at market prices • Regional Variation • What constitutes affordable housing in Portland is quite different than what constitutes affordable housing in San Francisco • Two approaches to measuring affordability: ratios and residuals

  22. Measuring Affordability • The ratio compares housing costs (prices, rents or mortgage payments) against income (wages, benefits, etc) • It is often suggested 30-40% of household income can reasonably be spent on housing • The residual looks at disposable income after the cost of a decent home have been deducted • This suggests that there is an absolute minimum disposable income required to sustain an acceptable quality of life; it is linked to poverty line estimates

  23. Portland Area Affordability Source: 2012 ACS

  24. Portland Area Affordability 5% = Full Occupancy Source: Norris, Beggs and Simpson

  25. Trade-Offs • Possible to trade off housing costs and other costs, especially transportation costs • Pay more than 30-40% for housing but walk, bike or take transit to work • Not always simple to make that trade off and more difficult with rising transit costs and service reductions

  26. Thank You for Listening! Questions? Answers?

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