Summary: Commercial Real Estate Analysis and Investment
Ch.1. Real estate space and asset markets.
Space market ( the market for the usage of (or right to use) real property (land and built space); also referred to as the real estate usage market or rental market. Demand side: individuals, households and firms that want to use space for either consumption of production purposes. Supply side: real estate owners who rent space to tenants. 1. Segmentation of space markets.
Both the demand and supply side are location and type specific. Therefore, real estate markets are highly segmented ( Space markets are local rather than national, and specialized around building usage categories.
Primary geographic units are metropolitan areas (or metropolitan statistical areas, MSAs) ✓ Even within a single metropolitan area considerable geographic segmentation of space markets exists, for example the downtown or central business district (CBD) area. ✓ Space markets are also segmented by property usage type (office, retail, industrial and multifamily residential)
Supply, demand & rent in the space market.
Demand function: looks like the classical demand functions of economic theory
Supply is ‘kinked’: the vertical reflects the fact that the supply of office space is almost completely inelastic. ( There’s 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. MC = costs 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 level of rent. ( tends to be the long-run equilibrium rent. ✓ Rising supply line (after kink) => it would costs more to develop the next office building than it did to develop the last one. ✓ Decreasing supply line => location rent decreases over time in
Space market ( the market for the usage of (or right to use) real property (land and built space); also referred to as the real estate usage market or rental market. Demand side: individuals, households and firms that want to use space for either consumption of production purposes. Supply side: real estate owners who rent space to tenants. 1. Segmentation of space markets.
Both the demand and supply side are location and type specific. Therefore, real estate markets are highly segmented ( Space markets are local rather than national, and specialized around building usage categories.
Primary geographic units are metropolitan areas (or metropolitan statistical areas, MSAs) ✓ Even within a single metropolitan area considerable geographic segmentation of space markets exists, for example the downtown or central business district (CBD) area. ✓ Space markets are also segmented by property usage type (office, retail, industrial and multifamily residential)
Supply, demand & rent in the space market.
Demand function: looks like the classical demand functions of economic theory
Supply is ‘kinked’: the vertical reflects the fact that the supply of office space is almost completely inelastic. ( There’s 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. MC = costs 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 level of rent. ( tends to be the long-run equilibrium rent. ✓ Rising supply line (after kink) => it would costs more to develop the next office building than it did to develop the last one. ✓ Decreasing supply line => location rent decreases over time in