COMMERCIAL REAL ESTATE

COMMERCIAL REAL ESTATE

INVESTMENT & ANALYSIS Complete summary whole book.PART I. Introduction to real estate economics 1 / 10

1.Real estate space and Asset Markets 1.1 Space market ●The space market is the market for the usage (or right to use) real property (land and built space). Also referred to as the real estate usage or rental market.●The price of the right to possess and use the space for a specified temporary period of time is commonly called the rent.●The real estate space markets are segmented. Space markets tend to be local rather than national, and specialized around building usage categories.●An MSA is a Metropolitan Statistical Area and encompasses a central city and its surrounding suburbs and tends to be relatively integrated economically, culturally and socially.●The major types of space markets for rental property include office, retail, industrial, and multifamily residential. Smaller and more specialized markets are hotels, health facilities, self-storage and others.●The real estate market supply function is kinked. The kink represents how new additional supply will respond to rents. When the long-run marginal cost of development rises, so does the supply. If it falls, so does the supply. And if it remains the same, so does supply. If space is not very restricted, as in the USA, research has shown the middle line after the kink is the most probable outcome.●The principal cause of rising supply function is the cost of land. In the space market this is caused by land scarcity in the presence of growing usage demand. This results in increasing land rent, as space users are willing to pay more real dollars per year for the same location.

1.2 Asset market ●The real estate asset market is the market of ownership of real estate assets. Real estate assets consist of real property and is therefore often referred to a property market. The real estate asset market must be viewed as part of the larger capital market, the market for capital assets of all types.●Capital markets can be divided into four categories according to whether they are public or private markets, and according to whether the assets traded are equity or debt.●Public markets have high liquidity and informational efficiency, because asset prices respond quickly to relevant news.●In private markets it is common to trade in whole assets, instead of ‘shares’ or ‘units’ of ownership and the transaction costs (as a fraction of the asset being traded in one transaction) are higher.●Cap rates are based on 1) opportunity cost of capital - as it is competition for the investor’s money, 2) growth expectations and 3) risk. 2 / 10

• Real Estate system

2.1 Commercial Property Development Industry ●The commercial property development industry converts financial capital into physical capital, thereby governing the stock of supply in the space market.●The real estate system consists of three components: the space market, the asset market, and the development industry. See book p.27 for the systems dynamics model of the system.○The space market determines the current operating cash flows produced by the real estate assets that are the fundamental subjects of the asset market.The space and asset markets, reflecting the underlying economic base and the capital markets, interact to produce current real estate market values.These values represent the output from the asset market; which is the input into the development industry.○A negative feedback loop within the real estate system is the ability of the asset market to regulate the flow of financial capital to the development industry. An example of positive feedback loop within the real estate system was the rising asset prices that rose just because they had been rising in the 2005-2007 period.

2.2 4q model 3 / 10

Within the 4Q model, the four quadrants depict four binary relationships that together complete the linkages between the space market, the asset market, and the development industry. It is most useful for examining simultaneously the effect on the long-run equilibrium both within and between the space and asset markets. For further explanation see

https://www.youtube.com/watch?v=kVwHvliV1pA.

PART II. Urban economics and real estate market analysis

• Central Place Theory and the

system of cities 3.1 Pattern of city size and city location ●each city has a place and a role within a system of cities.●The rank/size rule can be expressed as follows: City population = Largest city’s population/ rank of city.●With some exceptions, cities of similar size are not located near each other 4 / 10