Lecture 1: Introduction (1,2,3)
Article 1: Geltner et al - Commercial Real Estate: Analysis and Investment
Chapter 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, so land parcels and the
buildings on it. This type of market is referred to as the usage market or the rental market. The price
of the right to use space for a temporary period of time is called rent. The rent gives a signal about
the value of built space and the current balance of supply and demand for that space. If usage
demand grows, rents will tend to rise.
§1.1.1 Segmentation of space markets: the immobility of real estate
Users in the market for built space generally need a specific type of space in a rather specific
location. The supply side of the space market is also location and type specific. They can’t easily be
moved and the function can’t easily be changed. This heterogeneity causes real estate markets to be
highly geographically segmented, meaning that they tend to be local and specialized around building
usage categories. Even within a metropolitan area submarkets can exist (downtown is different from
CBD). Real estate markets are also segmented by property usage type (office, retail, industrial,
residential).
§ 1.1.2 Supply, demand and rent in the space market
Demand function looks the same as the classic demand function: downward sloping continuous lines
that move to the right as demand grows. The supply function is kinked, meaning that it is not
continuous, but has a corner or break in it. The supply function starts with a vertical line at the
current quantity of space supply in the market. This is due to the inelastic market: if demand falls,
office space can’t be reduced. The kink occurs at the current quantity of built space at a rent level
that equates to the long-run marginal cost of supplying additional space to the market. This is the
cost of developing new buildings. The level of rent that is just sufficient to stimulate profitable new
development in the market is called the replacement cost of rent, and this tends to be the long-run
equilibrium rent in the market. If rents are below replacement cost, developments can’t profitably
develop new buildings. If it rises above replacement cost, new development will be profitable,
forcing rents back down to the long-run equilibrium level in a few years.
Article 1: Geltner et al - Commercial Real Estate: Analysis and Investment
Chapter 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, so land parcels and the
buildings on it. This type of market is referred to as the usage market or the rental market. The price
of the right to use space for a temporary period of time is called rent. The rent gives a signal about
the value of built space and the current balance of supply and demand for that space. If usage
demand grows, rents will tend to rise.
§1.1.1 Segmentation of space markets: the immobility of real estate
Users in the market for built space generally need a specific type of space in a rather specific
location. The supply side of the space market is also location and type specific. They can’t easily be
moved and the function can’t easily be changed. This heterogeneity causes real estate markets to be
highly geographically segmented, meaning that they tend to be local and specialized around building
usage categories. Even within a metropolitan area submarkets can exist (downtown is different from
CBD). Real estate markets are also segmented by property usage type (office, retail, industrial,
residential).
§ 1.1.2 Supply, demand and rent in the space market
Demand function looks the same as the classic demand function: downward sloping continuous lines
that move to the right as demand grows. The supply function is kinked, meaning that it is not
continuous, but has a corner or break in it. The supply function starts with a vertical line at the
current quantity of space supply in the market. This is due to the inelastic market: if demand falls,
office space can’t be reduced. The kink occurs at the current quantity of built space at a rent level
that equates to the long-run marginal cost of supplying additional space to the market. This is the
cost of developing new buildings. The level of rent that is just sufficient to stimulate profitable new
development in the market is called the replacement cost of rent, and this tends to be the long-run
equilibrium rent in the market. If rents are below replacement cost, developments can’t profitably
develop new buildings. If it rises above replacement cost, new development will be profitable,
forcing rents back down to the long-run equilibrium level in a few years.
