Real estate: artikelen
Week 1
Geltner et al. 2007 - Commercial Real Estate Analysis and Investments
Market = a mechanism trough which goods and services are voluntarily exchanged among
different owners
Space market = market for the usage of (or right to use) real property (land and built space).
This type of market is also often referred to as the real estate usage market or the rental
market.
Demand side; individuals, households, firms etc.
Supply side; real estate owners
The rental price;
- The price of the right to use space for a specified temporary period of time (per SF)
- Determined by supply and demand in the space market.
- Gives a signal about the current value of built space and the current balance of supply and
demand for that space.
- If usage demand grows and space supply remains constant, rents will tend to rise, and vice
versa.
The immobility of real estate:
- Real estate space market are highly segmented; both supply and demand are
location and type specific
rental prices for physically similar space can differ widely from one location to
another, or from one type of building to another, in virtually the same location.
- Primary geographic units of space market segmentation are metropolitan areas
Segmentation exist in metropolitan areas because of the submarkets, example;
CBD
- Real estate space markets are segmented by property usage type (office, retail,
industrial, residental etc.)
,Supply, demand and rent in the space market
VB: tussen ’70 en ’80 veranderd de vraag naar kantoorruimte doordat de economie meer
service gericht wordt i.p.v. robuuste arbeid. Daarnaast groeit de economie en meer
werknemers zijn nodig.
The underlying source of the space demand was the need of office workers for space
in which to work. As the number of office workers increased, this need grew. The
need for office space also grew because technological change, such as the rise in the
office use of personal computers and fax machines, made more space necessary per
worker.
Supply is Kinked
LRMC = long-run marginal cost
Three possibilities; rising, level, or falling.
A rising supply line results when the
development cost of new buildings is
greater as more total stock of supply is
added into the market. If it would cost
less, then the supply function is falling. If
it would cost the same, then the function
is level beyond the kink point.
The supply function starts out as a
nearly vertical line at the current quantity of space supply in the market (in this case 5
million SF). This reflects the fact that the supply of office space is almost completely inelastic:
if demand falls, office space cannot be reduced (at least in the short to medium term, even
for a number of years). This is a consequence of the extreme longevity of built space.
The kink in the supply function occurs at the current quantity of built space at a rent level
that equates (on a capitalized present value basis) to the long-run marginal cost of supplying
additional space to the market
marginal cost = the cost of developing new buildings, including the site acquisition
cost as well as the construction cost and necessary profit for developers.
The level of rent that is just sufficient to stimulate profitable new development in the market
is called the replacement cost level of rent, and this tends to be the long-run equilibrium
rent in the market. If rents are said to be ‘‘below replacement cost’’ in a market, it means
that developers cannot profitably undertake new development in that market. If rents rise
above the replacement cost level, new development will be very profitable.
,Relation among supply, development cost, and rent
Cap rate = Capitalization rate is a real estate valuation measure used to compare different
real estate investments.
VB: if an investment property costs $1 million dollars and it generates $75,000 of NOI (net
operating income) a year, then it's a 7.5 percent CAP rate. Usually different CAP rates
represent different levels of risk. Low CAP rates imply lower risk, higher CAP rates imply
higher risk.
Forcasting furture direction of rents
Growth prospects for rents in a market depend on:
- The current state of the market (e.g., are rents currently below the long-run
equilibrium level?)
- How usage demand will change in the future (will it grow or stagnate?)
- The shape of the long-run supply function in the market (is it flat or rising?).
In addition to marketwide considerations, each individual property may have unique
attributes that affect its own growth prospects, such as existing leases, need for capital
improvements, and so forth.
Is the supply function rising, level or falling?
Growing usage demand;
- Rising supply function
- Land scarcity
Result: increasing location rent; space users are willing to pay more for the location.
Result: increasing development costs; If demand keeps growing in the face of fixed
land supply, the real price of site acquisition will rise, and this will add to the cost of
development.
VB:
- Right to the kink point rise; good buildable sites become scarcer, construction costs
are more expensive, acquisition costs are increasing because of the existing
structure
- Right to the kink point falling; location rent is declining, location is losing its
centrality
Asset market
Asset market = the market for the ownership of real estate assets. Real estate assets are real
property, that is, land parcels and the buildings on them. Often referred to as the property
market. From an economic perspective, such assets consist essentially of claims to future
, cash flows (vb stocks and bonds); the real estate asset market must be viewed as part of the
larger capital market.
Four categories of capital markets
Public markets =
- Small homogeneous units of ownership in assets trade in public exchanges in which
many buyers and sellers are participating in the market with price quotes available
for all to observe.
- Stock market; transaction prices at which the units of the assets trade are typically
reported publicly on a daily or more frequent basis
- Relatively high degree of liquidity; possible to quickly sell units of the assets at or
near the last quoted price
- Informational efficiency; ability of asset prices to respond quickly to relevant news is
known as asset market
Private markets =
- Assets are traded in private transactions arranged between individual buyers and
sellers who have ‘‘found’’ each other
- Whole assets traded in a single transaction; individual transactions therefore tends
to be larger in the private markets; consequences for the nature of the asset price
information that is available to the public.
- Less liquid than public markets, as it takes longer for sellers to find buyers, and it is
more difficult to ascertain a fair price for a given whole asset
Debt assets =
- The rights to the future cash flow to be paid out by borrowers on loans they have
taken out (e.g., interest payments and retirement of principal)
- Give their owners (e.g., the lenders or bondholders) a relatively ‘‘senior’’ or
‘‘preferred’’ claim for obtaining the cash which the underlying asset (the source of
the cash flow) can generate.
- Debt cash flows are contractually specified; the recipients know more precisely with
relative certainty how much future cash flow they will be receiving, and when.
- Less risky than equity assets
- Debt assets also typically have specified ‘‘maturity,’’ that is, finite lifetimes after
which there will be no further cash flow.
Week 1
Geltner et al. 2007 - Commercial Real Estate Analysis and Investments
Market = a mechanism trough which goods and services are voluntarily exchanged among
different owners
Space market = market for the usage of (or right to use) real property (land and built space).
This type of market is also often referred to as the real estate usage market or the rental
market.
Demand side; individuals, households, firms etc.
Supply side; real estate owners
The rental price;
- The price of the right to use space for a specified temporary period of time (per SF)
- Determined by supply and demand in the space market.
- Gives a signal about the current value of built space and the current balance of supply and
demand for that space.
- If usage demand grows and space supply remains constant, rents will tend to rise, and vice
versa.
The immobility of real estate:
- Real estate space market are highly segmented; both supply and demand are
location and type specific
rental prices for physically similar space can differ widely from one location to
another, or from one type of building to another, in virtually the same location.
- Primary geographic units of space market segmentation are metropolitan areas
Segmentation exist in metropolitan areas because of the submarkets, example;
CBD
- Real estate space markets are segmented by property usage type (office, retail,
industrial, residental etc.)
,Supply, demand and rent in the space market
VB: tussen ’70 en ’80 veranderd de vraag naar kantoorruimte doordat de economie meer
service gericht wordt i.p.v. robuuste arbeid. Daarnaast groeit de economie en meer
werknemers zijn nodig.
The underlying source of the space demand was the need of office workers for space
in which to work. As the number of office workers increased, this need grew. The
need for office space also grew because technological change, such as the rise in the
office use of personal computers and fax machines, made more space necessary per
worker.
Supply is Kinked
LRMC = long-run marginal cost
Three possibilities; rising, level, or falling.
A rising supply line results when the
development cost of new buildings is
greater as more total stock of supply is
added into the market. If it would cost
less, then the supply function is falling. If
it would cost the same, then the function
is level beyond the kink point.
The supply function starts out as a
nearly vertical line at the current quantity of space supply in the market (in this case 5
million SF). This reflects the fact that the supply of office space is almost completely inelastic:
if demand falls, office space cannot be reduced (at least in the short to medium term, even
for a number of years). This is a consequence of the extreme longevity of built space.
The kink in the supply function occurs at the current quantity of built space at a rent level
that equates (on a capitalized present value basis) to the long-run marginal cost of supplying
additional space to the market
marginal cost = the cost of developing new buildings, including the site acquisition
cost as well as the construction cost and necessary profit for developers.
The level of rent that is just sufficient to stimulate profitable new development in the market
is called the replacement cost level of rent, and this tends to be the long-run equilibrium
rent in the market. If rents are said to be ‘‘below replacement cost’’ in a market, it means
that developers cannot profitably undertake new development in that market. If rents rise
above the replacement cost level, new development will be very profitable.
,Relation among supply, development cost, and rent
Cap rate = Capitalization rate is a real estate valuation measure used to compare different
real estate investments.
VB: if an investment property costs $1 million dollars and it generates $75,000 of NOI (net
operating income) a year, then it's a 7.5 percent CAP rate. Usually different CAP rates
represent different levels of risk. Low CAP rates imply lower risk, higher CAP rates imply
higher risk.
Forcasting furture direction of rents
Growth prospects for rents in a market depend on:
- The current state of the market (e.g., are rents currently below the long-run
equilibrium level?)
- How usage demand will change in the future (will it grow or stagnate?)
- The shape of the long-run supply function in the market (is it flat or rising?).
In addition to marketwide considerations, each individual property may have unique
attributes that affect its own growth prospects, such as existing leases, need for capital
improvements, and so forth.
Is the supply function rising, level or falling?
Growing usage demand;
- Rising supply function
- Land scarcity
Result: increasing location rent; space users are willing to pay more for the location.
Result: increasing development costs; If demand keeps growing in the face of fixed
land supply, the real price of site acquisition will rise, and this will add to the cost of
development.
VB:
- Right to the kink point rise; good buildable sites become scarcer, construction costs
are more expensive, acquisition costs are increasing because of the existing
structure
- Right to the kink point falling; location rent is declining, location is losing its
centrality
Asset market
Asset market = the market for the ownership of real estate assets. Real estate assets are real
property, that is, land parcels and the buildings on them. Often referred to as the property
market. From an economic perspective, such assets consist essentially of claims to future
, cash flows (vb stocks and bonds); the real estate asset market must be viewed as part of the
larger capital market.
Four categories of capital markets
Public markets =
- Small homogeneous units of ownership in assets trade in public exchanges in which
many buyers and sellers are participating in the market with price quotes available
for all to observe.
- Stock market; transaction prices at which the units of the assets trade are typically
reported publicly on a daily or more frequent basis
- Relatively high degree of liquidity; possible to quickly sell units of the assets at or
near the last quoted price
- Informational efficiency; ability of asset prices to respond quickly to relevant news is
known as asset market
Private markets =
- Assets are traded in private transactions arranged between individual buyers and
sellers who have ‘‘found’’ each other
- Whole assets traded in a single transaction; individual transactions therefore tends
to be larger in the private markets; consequences for the nature of the asset price
information that is available to the public.
- Less liquid than public markets, as it takes longer for sellers to find buyers, and it is
more difficult to ascertain a fair price for a given whole asset
Debt assets =
- The rights to the future cash flow to be paid out by borrowers on loans they have
taken out (e.g., interest payments and retirement of principal)
- Give their owners (e.g., the lenders or bondholders) a relatively ‘‘senior’’ or
‘‘preferred’’ claim for obtaining the cash which the underlying asset (the source of
the cash flow) can generate.
- Debt cash flows are contractually specified; the recipients know more precisely with
relative certainty how much future cash flow they will be receiving, and when.
- Less risky than equity assets
- Debt assets also typically have specified ‘‘maturity,’’ that is, finite lifetimes after
which there will be no further cash flow.
