SlideShare una empresa de Scribd logo
1 de 41
Descargar para leer sin conexión
MIT OpenCourseWare
http://ocw.mit.edu



11.433J / 15.021J Real Estate Economics
Fall 2008


For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.
MIT Center for Real Estate


          Week 1: Introduction
• The space versus asset market: 4 Quadrant
  math.
• Real Estate Micro Economics: Hedonics,
  Location, density, government regulations.
• Real Estate Macro Economics: timing
  behavior (search, moving, contracts),
  cycles, regional growth.
MIT Center for Real Estate

  The Role of Real Estate in the
           Economy
• Construction [6% of GDP]
• Service flow, “Shelter”, rent plus imputed
  rent [20% + of GDP]
• Assets [55-60% of total national wealth]
• Land? Not part of GDP (we don’t make
  land), but it is part of wealth.
• Accounting, measurement difficulties [book
  versus market value]
MIT Center for Real Estate
                     Value of New Construction Put in Place, 2002
                                                    $ (in Billions)        % of GDP



       Private Construction                             650                   6.1
           Buildings
            Residential buildings                       422                   4.0
            Nonresidential buildings                    167                   1.6
               Industrial                                17                   0.2
               Office                                    38                   0.4
               Hotels/Motels                             10                   0.1
               Other commercial                          56                   0.5
               All other nonresidential                  46                   0.4
           Nonbuilding construction
            Public utilities                              54                  0.5
            All other                                      7                  0.1


       Public Construction                              210                   2.0
          Buildings                                     102                   1.0
             Housing and development                      6                   0.1
             Industrial                                   2                   0.0
             Other                                       94                   0.9
          Nonbuilding construction                      108                   1.0
             Infrastructure                              97                   0.9
             All other                                   11                   0.1


       Total new construction                           861                   8.1
       Total GDP:                                    10,624                 100.0


     Source: Current Construction Reports, Series C30, U.S. Census Bureau. Gross Domestic
     Product from Economic Report of the President, 2004
                                                                                            Figure by MIT OpenCourseWare.
MIT Center for Real Estate

The Value of US Real Estate Assets (1990)
                                                $, in billions   % of Total

Residential                                        6,122           69.8



Single Family Homes                                5,419           61.7

Multifamily                                         552             6.3

Condominiums/Coops                                   96             1.1

Mobile Homes                                         55             0.6



Nonresidential                                     2,655           30.2



Retail                                             1,115           12.7

Office                                             1,009           11.5

Manufacturing                                       308             3.5

Warehouse                                           223             2.5



Total U.S. Real Estate                             8,777           100.0


   Adapted from DiPasquale and Wheaton (1996)
MIT Center for Real Estate
 U.S. Real Estate
    Ownership, 1990
                                All Real Estate           Residential Only           Nonresidential Only


                                 $, in billions    %       $, in billions     %       $, in billions        %

 Individuals                        5,088         58.0        5,071          82.8          17               0.6

 Corporations                       1,699         19.4          66            1.1        1,633             61.5

 Partnerships                       1,011         11.5         673           11.0         338              12.7

 Nonprofits                          411           4.7         104            1.7         307              11.6

 Government                          234           2.6         173            2.8          61               2.3

 Institutional Investors             128           1.5          14            0.2         114               4.3

 Financial Institutions              114           1.3          13            0.2         101               3.8

 Other (Including Foreign             92           1.0           8            0.1          84               3.2




 Total:                             8,777         100.0       6,122          100.0       2,655             100.0




 % of All Real Estate                             100.0                      69.8                          30.2

Adapted from DiPasquale and Wheaton (1996)
Exhibit 2-3: The DiPasquale-Wheaton 4-Quadrant Diagram…
                                          D
                            Rent $

                                                     Space Market:
         Asset Market:
                                                     Rent Determination
         Valuation




                                  R*
                                                                         D



  Price $        P*                                  Q*                Stock (SF)



                                  C*
Asset Market:
Construction                            Space Market:
                                        Stock Adjustment



                         Construction (SF)
MIT Center for Real Estate


 Systems of Economic Equations
• Parameters: Constants that reflect underlying
  behavior, α, β, δ.
• Endogenous variables: values that the model
  “determines: C, S, R, P.
• Exogenous variables: values that determine the
  model’s variables, but which the models variables
  in turn do not influence: i, E.
• Equilibrium: Solution to the endogenous variables
  given exogenous values and parameters.
• Comparative Statics: How changes in exogenous
  variables change equilibrium endogenous ones.
MIT Center for Real Estate

               1st quadrant
1). Office Demand = α1ER-β1
      E= office employment
      R = rent per square foot
      β1 = rental elasticity of demand, %change
           in sqft per worker/% change in rent]
      α1 = sqft / E when R=$1
2). Demand = Stock = S
3). Hence: R = (S/α1E)–1/ β1 {downward sloping schedule}
MIT Center for Real Estate

             2nd and 3rd Quadrants
4). P = R/i
      i = all inclusive cap rate
5). Office Construction rate:
      C/S = α2Pβ2
      P = Asset Price per square foot
      [“Q” theory?]
      β2 = Price elasticity of supply:
      [% change in construction rate/% change
      in price]
MIT Center for Real Estate

               4th Quadrant
6). Replacement version (graph):
      E= fixed, δS = building losses
      ΔS/S = C/S - δ [Construction rate – loss
  rate equals net additions = 0 in equilibrium]
7). Steady Demand growth version:
      ΔE/E = δ, no losses
      Hence: ΔS/S - ΔE/E = C/S - δ
      [what happens to S/E if C/S >< δ ?]
Effect of Demand Growth in Space Market: More
          MIT Center for Real Estate       Jobs

                Asset Market:   Rent $
                                                          Space Market:
                Valuation                                 Rent Determination

                                      D0            D1




                                R*




Price $          P*                             Q*                 Stock (SF)




                                C*
Asset Market:
Construction
                                       Space Market:
                                       Stock Adjustment
                                Construction (SF)
Effect of Demand Growth in Space Market:
                                                    First phase…
          MIT Center for Real Estate
                                Rent $                  Space Market:
                Asset Market:                           Rent Determination
                Valuation

                                              D0          D1
                                                                             Doesn’t form a
                                                                             rectangle.


                                         R*

                                         Excess (negative)
                                         vacancy…


Price $             P*                                  Q*              Stock (SF)




                                         C*
Asset Market:
Construction
                                              Space Market:
                                              Stock Adjustment

                                Construction (SF)
Effect of Demand Growth in Space Market:
                                                   2nd phase…
          MIT Center for Real Estate
                Asset Market:           Rent $            Space Market:
                Valuation                                 Rent Determination

                                             D0             D1
                                   R1                                   Rents spike and get rid of
                                                                        excess (negative) vacancy

                                        R*




Price $   P1      P*                                      Q*              Stock (SF)
                                                                                   Can this be a long-
                                                                                   run equilibrium
                                                                                   result?…
                                        C*
Asset Market:                                                                          Doesn’t form a
Construction                                                                           rectangle.
                                                 Space Market:
                                                 Stock Adjustment

                                Construction (SF)
Effect of Demand Growth in Space Market: LR Equilibrium…
          MIT Center for Real Estate
                      Asset Market: Rent $                   Space Market:
                      Valuation                              Rent Determination

                                                  D0           D1
                                       R1
                                      R**

                                             R*



                P**
Price $   P1            P*                                   Q*        Q** Stock (SF)


                                                                                  In long run equilibrium
                                                                                  new supply tempers
                                             C*                                   initial rent spike
Asset Market:
Construction
                                     C**          Space Market:
                                                  Stock Adjustment

                                   Construction (SF)
Effect of Demand Growth in Asset Market…
             MIT Center for Real Estate
              Asset Market:   Rent $                   Space Market:
              Valuation                                Rent Determination

        D0
                   11% CAP
D1
                                       R*
8%CAP


                                        R**
              SR

              LR
        P1                                                         Q**
                        P*                              Q*
 Price $      P**                                                        Stock (SF)




                                       C*
Asset Market:
Construction
                                              Space Market:
                                        C**   Stock Adjustment

                              Construction (SF)
MIT Center for Real Estate

  Using the 4-Quadrant Model to
assess the impact of other changes.
 • What happens if Construction costs rise or the
   supply schedule shifts?
 • Suppose depreciation speeds up (functional
   obsolescence dictates shorter life spans of
   buildings)?
 • How to interpret owner occupied space (e.g.
   Single Family Housing)?
 • EXERCISE #1.
MIT Center for Real Estate

Current Issues: using the diagram
• Zero (or negative) population and labor force
  growth in: Japan, Germany, Italy, Spain…?
• Increasing use of the Internet for retail
  shopping?
• Expanded availability of (subprime) mortgage
  credit to households previously ineligible?
• Continued global saving glut from growth in
  Asia – where savings rates are 20%+
MIT Center for Real Estate

Real Estate Macro-economics: Real
 Estate Cycles and Secular Trends
• What are real estate cycles? Truly independent
  oscillations or just reactions to the economy.
• Cycles vary with Property type.
• Cycles are related to broader capital markets.
• Secular trend: growth rates of the stock
  (construction) slow as economy matures.
• Secular trend: Prices adjusted for inflation rise
  over time?
MIT Center for Real Estate
Prefect Historic correlation between economic recessions
  and Housing Production – except for the last 5 years
                                   5                                                         3.2
  Year-over-year change in total




                                   4                                                         2.8
      employment, millions




                                                                                                   Total housing starts,
                                   3                                                         2.4




                                                                                                     millions of units
                                   2                                                         2.0

                                   1                                                         1.6
                                   0                                                         1.2

                                   -1                                                        0.8

                                   -2                                                        0.4

                                   -3                                                        0.0
                                        1960
                                        1962
                                        1964
                                        1966
                                        1968
                                        1970
                                        1972
                                        1974
                                        1976
                                        1978
                                        1980
                                        1982
                                        1984
                                        1986
                                        1988
                                        1990
                                        1992
                                        1994
                                        1996
                                        1998
                                        2000
                                        2002
                                        2004
                                        2006
                                                 New Jobs (L)     Total Housing Starts (R)

                                        Sources: BLS, BOC, TWR.
MIT Center for Real Estate
Prefect Historic correlation between economic recessions
     and Housing Prices – except for the last 5 years
                                 Housing and U.S. Job Growth
              6%                                                                     12%

              5%                                                                     10%

              4%                                                                     8%




                                                                                           real median home prices
                                                                                     6%
              3%
                                                                                     4%
job growth




              2%
                                                                                     2%
              1%
                                                                                     0%
              0%
                                                                                     -2%
             -1%                                                                     -4%
                                                                   based on 4-qtr
             -2%                                                   moving averages   -6%
             -3%                                                                     -8%




                   1
             20 Q3
             20 Q1
             20 Q3
             19 Q1
             19 Q3
             19 Q1
             20 Q3
             20 Q1
             19 Q3
             19 Q1
             19 Q3
             19 Q1
             19 Q3
             19 Q1
             19 Q3
             19 Q3


             19 Q3
             19 Q1


             19 Q1
             19 Q3


             19 Q3


             19 Q3
             19 Q1


             19 Q1


             19 Q1




                  Q
               04
               05
               07
               95
               96
               98
               99
               01
               02
               87
               89
               90
               92
               93
               80
               81
               83
               84
               86
               69
               71
               72
               74
               75
               77
               78
         19




                           Job Grow th     Real Median Home Price Grow th (lagged)
MIT Center for Real Estate

With offices, building booms follow rents. The booms
  then generate falling rents = endogenous cycle?
           Office construction and rent growth (TWR sum of markets)
     140                                                                                                                                                             15
                                                                                                                                                       Forecast
     120
                                   Completions -                                                                                                                     10
                                   Historical average
     100

                                                                                                                                                                      5
      80

      60
                                                                                                                                                                      0

      40
                                                                                                                                                                      -5
      20

       0                                                                                                                                                             -10
           1988
                  1989

                         1990
                                1991
                                       1992
                                              1993
                                                     1994
                                                            1995
                                                                   1996

                                                                          1997
                                                                                 1998

                                                                                        1999
                                                                                               2000
                                                                                                      2001
                                                                                                             2002

                                                                                                                    2003
                                                                                                                           2004
                                                                                                                                  2005
                                                                                                                                         2006
                                                                                                                                                2007

                                                                                                                                                       2008
                                                                                                                                                              2009
                                   Completions in msf (L)                                             TWR rent inflation in % (R)

                                                                                                                           Figure by MIT OpenCourseWare.
MIT Center for Real Estate

             National Office Market
             Completions Rate vs. Real Rent
                                                                                                                                       $ Per Sqft
                                                                                                                                        Forecast
                                                                                                                                                      34.00

    8.00%
                                                                                                                                                      32.00


    6.00%                                                                                                                                             30.00



                                                                                                                                                      28.00
    4.00%


                                                                                                                                                      26.00
    2.00%

                                                                                                                                                      24.00

    0.00%
                                                                                                                                                      22.00



    -2.00%                                                                                                                                            20.00
             1971

                    1973

                           1975

                                  1977

                                         1979

                                                1981

                                                       1983

                                                              1985

                                                                     1987

                                                                            1989

                                                                                   1991

                                                                                          1993

                                                                                                 1995

                                                                                                        1997

                                                                                                                  1999

                                                                                                                         2001

                                                                                                                                2003

                                                                                                                                        2005

                                                                                                                                               2007
                             Total Employment Growth (L)                     Real Rent (R)                     Completion Rate (L)
MIT Center for Real Estate
 Historically: Rents over the “cycle”
mean revert around Development costs
 PPI: Construction                                                                 TWR Rent Index
   200                                                                                         31
   190                                                                                         29
   180
                                                                                               27
   170
                                                                                               25
   160
   150                                                                                         23
   140
                                                                                               21
   130
                                                                                               19
   120
   110                                                                                         17

   100                                                                                         15




  20 1

  20 1

         1
  19 1




  19 1

  20 1

  20 1

  20 1

  20 1

  20 1

  20 1

  20 1
  19 1

  19 1

  19 1

  19 1

  19 1
  19 1

  19 1

  19 1

  19 1




       Q

       Q

       Q
       Q

       Q

       Q

       Q
       Q

       Q

       Q

       Q

       Q

       Q

       Q

       Q

       Q

       Q

       Q
       Q

       Q

       Q




     06

     07

     08
     99




     03

     04

     05
     00

     01

     02
     91

     92

     93

     94

     95

     96

     97

     98
     88

     89

     90
  19




                     PPI: Construction Materials and Components   TWR Rent Index


  Source: BLS, TWR Office Outlook XL, Summer 2008
MIT Center for Real Estate
      Over the long run there also are:
        little cycles and Big cycles                    Broken
                                                        Ground
                                                        Projects
 Construction as % of Stock
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
  1901 1910 1919 1928 1937 1946 1955 1964 1973 1982 1991 2000

             Downtown                     Suburban
Price Index
        16




                  0
                      50
                           100
                                 150
                                           200
                                                     250
                                                           300
                                                                 350
                                                                       400
             28
        16
             38
        16
             48
        16
             58
        16
             68
        16
             78
        16
             88
        16
             98
        17
             08
        17
             18
        17
             28
        17
             38
                                                                             g




        17
             48
        17
             58
        17
                                                                                                                   MIT Center for Real Estate




             68
                                                                             y




        17
             78
        17
             88
        17
             98
        18
             08




Y ear
        18
             18
        18
             28
        18
             38
        18
             48
        18
             58
        18
             68
                                                                             (




        18
             78
        18
             88
        18
             98
        19
                                                                             g




             08
        19
             18
        19
                                                                                Amsterdam (Real Guilders)




             28
                                                                             )




        19
             38
        19
             48
        19
             58
                                                                             Index of Historic Housing Prices in




        19
             68
MIT Center for Real Estate


                                       CPI Apartment Rent Indices for Selected "traditional" Cities: 1918-1999 (constant $)

                 400


                 350


                 300
Apartment Rent




                 250

                 200


                 150


                 100


                 50

                  0
                       1918

                               1921

                                      1924

                                             1927

                                                    1930

                                                            1933

                                                                   1936

                                                                          1939

                                                                                 1942

                                                                                        1945

                                                                                               1948

                                                                                                      1951

                                                                                                             1954

                                                                                                                     1957

                                                                                                                            1960

                                                                                                                                    1963

                                                                                                                                           1966

                                                                                                                                                  1969

                                                                                                                                                         1972

                                                                                                                                                                1975

                                                                                                                                                                       1978

                                                                                                                                                                              1981

                                                                                                                                                                                     1984

                                                                                                                                                                                            1987

                                                                                                                                                                                                   1990

                                                                                                                                                                                                          1993

                                                                                                                                                                                                                 1996
                                                                                                                    Year

                                                           NEW YORK                BOSTON                CHICAGO                   WASHINGTON D. C.                    SANFRANCISCO
MIT Center for Real Estate
         Long run Appreciation? Just inflation (3.5%) for 100 years
                     in NYC, but lots of decade risk
Price Index 1899 = 1.0
constant dollars/square ft.

   1.6


   1.4


   1.2


    1


   0.8


   0.6


   0.4


   0.2


    0
         1899   1909   1919   1929   1939   1949   1959   1969   1979   1989   1999


 Source: MIT 2002 Thesis
MIT Center for Real Estate

   Real Estate Micro-economics:
     Cities and Land Markets
• No two properties are identical [complete product
  differentiation]
• Properties are close if not perfect substitutes for
  each other – at some price differential.
• Price differentials are extremely large, and very
  predictable.
• Price differentials tend to be stable over time:
  local neighborhoods do not have independent
  cyclic movements.
MIT Center for Real Estate
House prices reflect both unit characteristics and
               location attributes


       17.19
        In(sale)




        8.52
                   5.71                   In(sqrt)                             9.34

                          Sale amount against square feet, Phoenix


                                                                 Figure by MIT OpenCourseWare.
MIT Center for Real Estate
                                      Repeat-Sale House price indices (CSW) for 15 submarkets
                                       within the greater Boston CMSA: 1982-2002 (current $)
                                                            House Price Indexes, Eastern M assachusetts, by City/Tow n Location

                         300




                         250
                                                                                                                                                                                      Boston
                                                                                                                                                                                      Southeast
                                                                                                                                                                                      W estern 1
                         200                                                                                                                                                          Far North Shore
Price Index (1990=100)




                                                                                                                                                                                      495 North
                                                                                                                                                                                      95 South
                                                                                                                                                                                      95 N orth
                         150                                                                                                                                                          W estern 2
                                                                                                                                                                                      Lowell Area
                                                                                                                                                                                      495 W est
                                                                                                                                                                                      North Shore
                         100                                                                                                                                                          South Shore
                                                                                                                                                                                      W orcester Area
                                                                                                                                                                                      Cam bridge Area
                                                                                                                                                                                      North Central
                          50




                           0
                               1982

                                       1983

                                              1984

                                                     1985

                                                              1986

                                                                     1987

                                                                            1988

                                                                                   1989

                                                                                          1990

                                                                                                 1991

                                                                                                         1992

                                                                                                                1993

                                                                                                                       1994

                                                                                                                              1995

                                                                                                                                     1996

                                                                                                                                            1997

                                                                                                                                                   1998

                                                                                                                                                          1999

                                                                                                                                                                 2000

                                                                                                                                                                        2001

                                                                                                                                                                               2002
                                                                                                        Year
MIT Center for Real Estate

   Home Prices within South California
         Median Home Price,
         Thousands ($ 2002.4)

$400

$350

$300


$250

$200


$150

$100
       77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02


             Los Angeles           Orange County   Riverside   Ventura   San Diego
         Sources: OFHEO, Torto Wheaton Research
MIT Center for Real Estate

     Office Rents Move together Cyclically but not
                   always secularly
      TW Rent Index, 2003$ per sqft
40

                                                                                                                                            Forecast

35


30


25


20


15
     1980

             1981
                    1982
                           1983

                                  1985
                                         1986

                                                1987
                                                       1988
                                                              1990

                                                                     1991
                                                                            1992
                                                                                   1993

                                                                                          1995
                                                                                                 1996

                                                                                                        1997
                                                                                                               1998
                                                                                                                      2000

                                                                                                                             2001
                                                                                                                                    2002

                                                                                                                                            2003
                                                                                                                                                   2005
            Los Angeles                  Orange County                      Ventura County                     Riverside                   San Diego
MIT Center for Real Estate

           Closely Correlated Industrial Rent
           Movements: few secular differences
               TW Rent Index, 2003$ per sqft
10.00
                                                                                                                             Forecast


 9.00

 8.00

 7.00

 6.00

 5.00

 4.00
        1980

                1981

                       1983

                              1984

                                      1986

                                             1987

                                                    1989

                                                           1990

                                                                  1992

                                                                         1993

                                                                                1995

                                                                                       1996

                                                                                              1998

                                                                                                     1999

                                                                                                            2001

                                                                                                                   2002

                                                                                                                            2004

                                                                                                                                   2005
        Los Angeles                  Orange County                Ventura County                 Riverside                San Diego
MIT Center for Real Estate
 Manhattan Office Rents vs. NJ and
          Conn. Suburbs
              TW Index, $2002 per sqft


  65
  60
  55
  50
  45
  40
  35
  30
  25
  20
       1980

               1981

                      1982

                             1983

                                    1985

                                           1986
                                                  1987

                                                         1988

                                                                1990

                                                                       1991

                                                                              1992

                                                                                     1993
                                                                                            1995

                                                                                                   1996

                                                                                                           1997

                                                                                                                  1998

                                                                                                                         2000

                                                                                                                                2001
                             Suburban Markets                                                             Manhattan
MIT Center for Real Estate

            Office Suburban Rents in Detail
      TW Index, $2002 per sqft

50

45
40

35

30
25

20
15

10
     1980

             1981

                    1982
                           1983

                                  1985

                                         1986
                                                1987

                                                       1988

                                                              1990
                                                                     1991

                                                                            1992

                                                                                   1993
                                                                                           1995

                                                                                                  1996

                                                                                                         1997
                                                                                                                1998

                                                                                                                        2000

                                                                                                                               2001
            Northern New Jersey                          Long Island                      Stamford                     Westchester
MIT Center for Real Estate


        Prices and Development
• Prices bring forth development: of any urban land
  use..
• Development occurs so as to maximize the
  residual value between: Price-capital costs
  (construction).
• This residual is “land value”. Development
  maximizes land value.
• Land Development is a natural real option: incur
  heavy capital costs to realize an income stream –
  or- wait (to do the same later) ?
MIT Center for Real Estate


   What is a real Estate Market?
• Within “markets” all properties should
  move together: high substitutability, easy
  mobility.
• Between markets there exists frictions,
  transportation costs, immobility of
  resources and low substitutability.
• MSA as “market”? CMSA?
MIT Center for Real Estate
Between Markets – there can be huge differences in
      both long term growth and cyclic risk
        1 9 8 0 = 1 0 0 (C o n s ta n t $ 2 0 0 5 )
 350


 300                                                                       B o s to n



 250                                                                       Los
                                                                           A n g e le
                                                                           s
 200                                                                       Ch ic a g
                                                                           o

 150                                                                       Na tio n


 100                                                                       Da lla s


  50


   0
       1980              1985               1990      1995   2000   2005
MIT Center for Real Estate

              Metropolitan Housing Markets
              can even move independently
                                FIGURE 5. Repeat Sale House Price Indices for Selected "new" Cities: 1975-1999 (constant
                                                                            $)
              250


              230


              210


              190


              170
House Price




              150


              130


              110


               90


               70


               50
                    75

                          76

                                77

                                      78

                                            79

                                                  80

                                                        81

                                                              82

                                                                      83

                                                                             84

                                                                                   85

                                                                                         86

                                                                                               87

                                                                                                      88

                                                                                                             89

                                                                                                                   90

                                                                                                                         91

                                                                                                                               92

                                                                                                                                     93

                                                                                                                                            94

                                                                                                                                                   95

                                                                                                                                                         96

                                                                                                                                                               97

                                                                                                                                                                     98

                                                                                                                                                                           99
               19

                         19

                               19

                                     19

                                           19

                                                 19

                                                       19

                                                             19

                                                                    19

                                                                            19

                                                                                  19

                                                                                        19

                                                                                              19

                                                                                                    19

                                                                                                           19

                                                                                                                  19

                                                                                                                        19

                                                                                                                              19

                                                                                                                                    19

                                                                                                                                          19

                                                                                                                                                 19

                                                                                                                                                        19

                                                                                                                                                              19

                                                                                                                                                                    19

                                                                                                                                                                          19
                                                                                                   Year


                                                                  Atlanta         Dennver          Houston         Los Angeles           Phoenix
MIT Center for Real Estate

Although sometimes they are subject
 to a common economy wide Shock
                           FIGURE 4. Repeat Sale House Price Indices for Selected "Traditional" Cities: 1975-1999 (constant $)


                250


                230


                210


                190


                170
  House Price




                150


                130


                110


                90


                70


                50
                      75

                            76

                                  77

                                        78

                                              79

                                                    80

                                                          81

                                                                82

                                                                      83

                                                                            84

                                                                                  85

                                                                                        86

                                                                                               87

                                                                                                     88

                                                                                                           89

                                                                                                                 90

                                                                                                                       91

                                                                                                                             92

                                                                                                                                   93

                                                                                                                                         94

                                                                                                                                               95

                                                                                                                                                     96

                                                                                                                                                           97

                                                                                                                                                                 98

                                                                                                                                                                       99
                 19

                           19

                                 19

                                       19

                                             19

                                                   19

                                                         19

                                                               19

                                                                     19

                                                                           19

                                                                                 19

                                                                                       19

                                                                                             19

                                                                                                    19

                                                                                                          19

                                                                                                                19

                                                                                                                      19

                                                                                                                            19

                                                                                                                                  19

                                                                                                                                        19

                                                                                                                                              19

                                                                                                                                                    19

                                                                                                                                                          19

                                                                                                                                                                19

                                                                                                                                                                      19
                                                                                                  Year

                                                          Boston           Chicago          New York       Sanfrancisco           Washington D.C.

Más contenido relacionado

La actualidad más candente

PFI/PPP (PUBLIC PRIVATE PARTNERSHIP) projects in UK prospective
PFI/PPP  (PUBLIC PRIVATE PARTNERSHIP) projects in UK prospective PFI/PPP  (PUBLIC PRIVATE PARTNERSHIP) projects in UK prospective
PFI/PPP (PUBLIC PRIVATE PARTNERSHIP) projects in UK prospective Tehmas Saeed
 
Traditional RIBA Plan of Work
Traditional RIBA Plan of WorkTraditional RIBA Plan of Work
Traditional RIBA Plan of WorkAzizan Supardi
 
Financial Analysis with Microsoft Excel 7th Edition Mayes Solutions Manual
Financial Analysis with Microsoft Excel 7th Edition Mayes Solutions ManualFinancial Analysis with Microsoft Excel 7th Edition Mayes Solutions Manual
Financial Analysis with Microsoft Excel 7th Edition Mayes Solutions Manualtuqykogod
 
Cost Estimation.pdf
Cost Estimation.pdfCost Estimation.pdf
Cost Estimation.pdfasasao1
 
Solar energy
Solar energy Solar energy
Solar energy Vivek Raj
 
Callison Mixed Use And Retail Centers Qualifications
Callison Mixed Use And Retail Centers QualificationsCallison Mixed Use And Retail Centers Qualifications
Callison Mixed Use And Retail Centers Qualificationsjsalem
 
Building Integrated Photovoltaics Systems
Building Integrated Photovoltaics SystemsBuilding Integrated Photovoltaics Systems
Building Integrated Photovoltaics SystemsSudhanshu Anand
 
Project & Infrastructure Financing- SPV for Solar Park
Project & Infrastructure Financing- SPV for Solar Park Project & Infrastructure Financing- SPV for Solar Park
Project & Infrastructure Financing- SPV for Solar Park Akhilesh Upadhyay
 
Real Estate Development Business Plan
Real Estate Development Business PlanReal Estate Development Business Plan
Real Estate Development Business Plankambanis
 
10 pv system_design
10 pv system_design10 pv system_design
10 pv system_designmemoaden
 
Photovoltaics Case Study
Photovoltaics Case StudyPhotovoltaics Case Study
Photovoltaics Case StudyLeonardo ENERGY
 
SkyBIM - Accelerate Project Roll-out with Integrated BIM Prototyping
SkyBIM - Accelerate Project Roll-out with Integrated BIM PrototypingSkyBIM - Accelerate Project Roll-out with Integrated BIM Prototyping
SkyBIM - Accelerate Project Roll-out with Integrated BIM PrototypingSkyBIM
 
Rooftop Solar Systems
Rooftop Solar SystemsRooftop Solar Systems
Rooftop Solar SystemsJay Ranvir
 
Type of Solar power systems - ORIANA SOLAR & ELECTRICALS pdf
Type of Solar power systems - ORIANA SOLAR & ELECTRICALS pdfType of Solar power systems - ORIANA SOLAR & ELECTRICALS pdf
Type of Solar power systems - ORIANA SOLAR & ELECTRICALS pdfORIANA SOLAR AND ELECTRICALS
 

La actualidad más candente (20)

PFI/PPP (PUBLIC PRIVATE PARTNERSHIP) projects in UK prospective
PFI/PPP  (PUBLIC PRIVATE PARTNERSHIP) projects in UK prospective PFI/PPP  (PUBLIC PRIVATE PARTNERSHIP) projects in UK prospective
PFI/PPP (PUBLIC PRIVATE PARTNERSHIP) projects in UK prospective
 
Traditional RIBA Plan of Work
Traditional RIBA Plan of WorkTraditional RIBA Plan of Work
Traditional RIBA Plan of Work
 
Design-Build Operate and Finance
Design-Build Operate and FinanceDesign-Build Operate and Finance
Design-Build Operate and Finance
 
Financial Analysis with Microsoft Excel 7th Edition Mayes Solutions Manual
Financial Analysis with Microsoft Excel 7th Edition Mayes Solutions ManualFinancial Analysis with Microsoft Excel 7th Edition Mayes Solutions Manual
Financial Analysis with Microsoft Excel 7th Edition Mayes Solutions Manual
 
Cost Estimation.pdf
Cost Estimation.pdfCost Estimation.pdf
Cost Estimation.pdf
 
Solar energy ppt
Solar energy pptSolar energy ppt
Solar energy ppt
 
Solar energy
Solar energy Solar energy
Solar energy
 
Callison Mixed Use And Retail Centers Qualifications
Callison Mixed Use And Retail Centers QualificationsCallison Mixed Use And Retail Centers Qualifications
Callison Mixed Use And Retail Centers Qualifications
 
Building Integrated Photovoltaics Systems
Building Integrated Photovoltaics SystemsBuilding Integrated Photovoltaics Systems
Building Integrated Photovoltaics Systems
 
Valuation
ValuationValuation
Valuation
 
Project & Infrastructure Financing- SPV for Solar Park
Project & Infrastructure Financing- SPV for Solar Park Project & Infrastructure Financing- SPV for Solar Park
Project & Infrastructure Financing- SPV for Solar Park
 
Real Estate Development Business Plan
Real Estate Development Business PlanReal Estate Development Business Plan
Real Estate Development Business Plan
 
10 pv system_design
10 pv system_design10 pv system_design
10 pv system_design
 
Horeca Starters Boek 2009
Horeca Starters Boek 2009Horeca Starters Boek 2009
Horeca Starters Boek 2009
 
Photovoltaics Case Study
Photovoltaics Case StudyPhotovoltaics Case Study
Photovoltaics Case Study
 
SkyBIM - Accelerate Project Roll-out with Integrated BIM Prototyping
SkyBIM - Accelerate Project Roll-out with Integrated BIM PrototypingSkyBIM - Accelerate Project Roll-out with Integrated BIM Prototyping
SkyBIM - Accelerate Project Roll-out with Integrated BIM Prototyping
 
Liquidated damages
Liquidated damagesLiquidated damages
Liquidated damages
 
Rooftop Solar Systems
Rooftop Solar SystemsRooftop Solar Systems
Rooftop Solar Systems
 
Type of Solar power systems - ORIANA SOLAR & ELECTRICALS pdf
Type of Solar power systems - ORIANA SOLAR & ELECTRICALS pdfType of Solar power systems - ORIANA SOLAR & ELECTRICALS pdf
Type of Solar power systems - ORIANA SOLAR & ELECTRICALS pdf
 
Pooja 1.2.2013
Pooja 1.2.2013Pooja 1.2.2013
Pooja 1.2.2013
 

Similar a Wk1

micron technollogy 1998_Q1_10Q
micron technollogy 1998_Q1_10Qmicron technollogy 1998_Q1_10Q
micron technollogy 1998_Q1_10Qfinance36
 
micron technollogy 1998_Q2_10Q
micron technollogy 1998_Q2_10Qmicron technollogy 1998_Q2_10Q
micron technollogy 1998_Q2_10Qfinance36
 
2010 IPD Residential Index Results Presentation
2010 IPD Residential Index Results Presentation2010 IPD Residential Index Results Presentation
2010 IPD Residential Index Results PresentationInspired Asset Management
 
The State of Distress in Chicago Area Real Estate
The State of Distress in Chicago Area Real EstateThe State of Distress in Chicago Area Real Estate
The State of Distress in Chicago Area Real EstateRyan Slack
 
State of chicago area distres -matthew anderson
State of chicago area distres -matthew andersonState of chicago area distres -matthew anderson
State of chicago area distres -matthew andersonguest381588
 
E-UpDates-November11—Global and Indian Economic Indicators
E-UpDates-November11—Global and Indian Economic IndicatorsE-UpDates-November11—Global and Indian Economic Indicators
E-UpDates-November11—Global and Indian Economic IndicatorsEcofin Surge
 
micron technollogy Q3_00_10Q
micron technollogy Q3_00_10Qmicron technollogy Q3_00_10Q
micron technollogy Q3_00_10Qfinance36
 
micron technollogy Q2_00_10Q
micron technollogy Q2_00_10Qmicron technollogy Q2_00_10Q
micron technollogy Q2_00_10Qfinance36
 
micron technollogy 1999_Q1_10Q
micron technollogy 1999_Q1_10Qmicron technollogy 1999_Q1_10Q
micron technollogy 1999_Q1_10Qfinance36
 
2013 aspe presentation
2013 aspe presentation2013 aspe presentation
2013 aspe presentationMichael Miller
 
Turkish construction industry at a glance contents 15 11 2012
Turkish construction industry at a glance contents 15 11 2012Turkish construction industry at a glance contents 15 11 2012
Turkish construction industry at a glance contents 15 11 2012Eraikune
 
micron technollogy Q1_01_10Q
micron technollogy Q1_01_10Qmicron technollogy Q1_01_10Q
micron technollogy Q1_01_10Qfinance36
 
STKI Summit 2011 Israeli Market Data
STKI Summit 2011 Israeli Market Data STKI Summit 2011 Israeli Market Data
STKI Summit 2011 Israeli Market Data Dr. Jimmy Schwarzkopf
 
terex 08_06_04_JP_Morgan_Conf
terex 08_06_04_JP_Morgan_Confterex 08_06_04_JP_Morgan_Conf
terex 08_06_04_JP_Morgan_Conffinance42
 
terex 08_06_04_JP_Morgan_Conf
terex 08_06_04_JP_Morgan_Confterex 08_06_04_JP_Morgan_Conf
terex 08_06_04_JP_Morgan_Conffinance42
 
micron technollogy 1999_Q3_10Q
micron technollogy 1999_Q3_10Qmicron technollogy 1999_Q3_10Q
micron technollogy 1999_Q3_10Qfinance36
 
E-Updates_Apr12—Indian & Global Economic Indicators
E-Updates_Apr12—Indian & Global Economic IndicatorsE-Updates_Apr12—Indian & Global Economic Indicators
E-Updates_Apr12—Indian & Global Economic IndicatorsEcofin Surge
 

Similar a Wk1 (20)

micron technollogy 1998_Q1_10Q
micron technollogy 1998_Q1_10Qmicron technollogy 1998_Q1_10Q
micron technollogy 1998_Q1_10Q
 
The real estate sector presentation
The real estate   sector presentationThe real estate   sector presentation
The real estate sector presentation
 
micron technollogy 1998_Q2_10Q
micron technollogy 1998_Q2_10Qmicron technollogy 1998_Q2_10Q
micron technollogy 1998_Q2_10Q
 
2010 IPD Residential Index Results Presentation
2010 IPD Residential Index Results Presentation2010 IPD Residential Index Results Presentation
2010 IPD Residential Index Results Presentation
 
Cs207 4
Cs207 4Cs207 4
Cs207 4
 
The State of Distress in Chicago Area Real Estate
The State of Distress in Chicago Area Real EstateThe State of Distress in Chicago Area Real Estate
The State of Distress in Chicago Area Real Estate
 
State of chicago area distres -matthew anderson
State of chicago area distres -matthew andersonState of chicago area distres -matthew anderson
State of chicago area distres -matthew anderson
 
E-UpDates Nov11
E-UpDates Nov11E-UpDates Nov11
E-UpDates Nov11
 
E-UpDates-November11—Global and Indian Economic Indicators
E-UpDates-November11—Global and Indian Economic IndicatorsE-UpDates-November11—Global and Indian Economic Indicators
E-UpDates-November11—Global and Indian Economic Indicators
 
micron technollogy Q3_00_10Q
micron technollogy Q3_00_10Qmicron technollogy Q3_00_10Q
micron technollogy Q3_00_10Q
 
micron technollogy Q2_00_10Q
micron technollogy Q2_00_10Qmicron technollogy Q2_00_10Q
micron technollogy Q2_00_10Q
 
micron technollogy 1999_Q1_10Q
micron technollogy 1999_Q1_10Qmicron technollogy 1999_Q1_10Q
micron technollogy 1999_Q1_10Q
 
2013 aspe presentation
2013 aspe presentation2013 aspe presentation
2013 aspe presentation
 
Turkish construction industry at a glance contents 15 11 2012
Turkish construction industry at a glance contents 15 11 2012Turkish construction industry at a glance contents 15 11 2012
Turkish construction industry at a glance contents 15 11 2012
 
micron technollogy Q1_01_10Q
micron technollogy Q1_01_10Qmicron technollogy Q1_01_10Q
micron technollogy Q1_01_10Q
 
STKI Summit 2011 Israeli Market Data
STKI Summit 2011 Israeli Market Data STKI Summit 2011 Israeli Market Data
STKI Summit 2011 Israeli Market Data
 
terex 08_06_04_JP_Morgan_Conf
terex 08_06_04_JP_Morgan_Confterex 08_06_04_JP_Morgan_Conf
terex 08_06_04_JP_Morgan_Conf
 
terex 08_06_04_JP_Morgan_Conf
terex 08_06_04_JP_Morgan_Confterex 08_06_04_JP_Morgan_Conf
terex 08_06_04_JP_Morgan_Conf
 
micron technollogy 1999_Q3_10Q
micron technollogy 1999_Q3_10Qmicron technollogy 1999_Q3_10Q
micron technollogy 1999_Q3_10Q
 
E-Updates_Apr12—Indian & Global Economic Indicators
E-Updates_Apr12—Indian & Global Economic IndicatorsE-Updates_Apr12—Indian & Global Economic Indicators
E-Updates_Apr12—Indian & Global Economic Indicators
 

Wk1

  • 1. MIT OpenCourseWare http://ocw.mit.edu 11.433J / 15.021J Real Estate Economics Fall 2008 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.
  • 2. MIT Center for Real Estate Week 1: Introduction • The space versus asset market: 4 Quadrant math. • Real Estate Micro Economics: Hedonics, Location, density, government regulations. • Real Estate Macro Economics: timing behavior (search, moving, contracts), cycles, regional growth.
  • 3. MIT Center for Real Estate The Role of Real Estate in the Economy • Construction [6% of GDP] • Service flow, “Shelter”, rent plus imputed rent [20% + of GDP] • Assets [55-60% of total national wealth] • Land? Not part of GDP (we don’t make land), but it is part of wealth. • Accounting, measurement difficulties [book versus market value]
  • 4. MIT Center for Real Estate Value of New Construction Put in Place, 2002 $ (in Billions) % of GDP Private Construction 650 6.1 Buildings Residential buildings 422 4.0 Nonresidential buildings 167 1.6 Industrial 17 0.2 Office 38 0.4 Hotels/Motels 10 0.1 Other commercial 56 0.5 All other nonresidential 46 0.4 Nonbuilding construction Public utilities 54 0.5 All other 7 0.1 Public Construction 210 2.0 Buildings 102 1.0 Housing and development 6 0.1 Industrial 2 0.0 Other 94 0.9 Nonbuilding construction 108 1.0 Infrastructure 97 0.9 All other 11 0.1 Total new construction 861 8.1 Total GDP: 10,624 100.0 Source: Current Construction Reports, Series C30, U.S. Census Bureau. Gross Domestic Product from Economic Report of the President, 2004 Figure by MIT OpenCourseWare.
  • 5. MIT Center for Real Estate The Value of US Real Estate Assets (1990) $, in billions % of Total Residential 6,122 69.8 Single Family Homes 5,419 61.7 Multifamily 552 6.3 Condominiums/Coops 96 1.1 Mobile Homes 55 0.6 Nonresidential 2,655 30.2 Retail 1,115 12.7 Office 1,009 11.5 Manufacturing 308 3.5 Warehouse 223 2.5 Total U.S. Real Estate 8,777 100.0 Adapted from DiPasquale and Wheaton (1996)
  • 6. MIT Center for Real Estate U.S. Real Estate Ownership, 1990 All Real Estate Residential Only Nonresidential Only $, in billions % $, in billions % $, in billions % Individuals 5,088 58.0 5,071 82.8 17 0.6 Corporations 1,699 19.4 66 1.1 1,633 61.5 Partnerships 1,011 11.5 673 11.0 338 12.7 Nonprofits 411 4.7 104 1.7 307 11.6 Government 234 2.6 173 2.8 61 2.3 Institutional Investors 128 1.5 14 0.2 114 4.3 Financial Institutions 114 1.3 13 0.2 101 3.8 Other (Including Foreign 92 1.0 8 0.1 84 3.2 Total: 8,777 100.0 6,122 100.0 2,655 100.0 % of All Real Estate 100.0 69.8 30.2 Adapted from DiPasquale and Wheaton (1996)
  • 7. Exhibit 2-3: The DiPasquale-Wheaton 4-Quadrant Diagram… D Rent $ Space Market: Asset Market: Rent Determination Valuation R* D Price $ P* Q* Stock (SF) C* Asset Market: Construction Space Market: Stock Adjustment Construction (SF)
  • 8. MIT Center for Real Estate Systems of Economic Equations • Parameters: Constants that reflect underlying behavior, α, β, δ. • Endogenous variables: values that the model “determines: C, S, R, P. • Exogenous variables: values that determine the model’s variables, but which the models variables in turn do not influence: i, E. • Equilibrium: Solution to the endogenous variables given exogenous values and parameters. • Comparative Statics: How changes in exogenous variables change equilibrium endogenous ones.
  • 9. MIT Center for Real Estate 1st quadrant 1). Office Demand = α1ER-β1 E= office employment R = rent per square foot β1 = rental elasticity of demand, %change in sqft per worker/% change in rent] α1 = sqft / E when R=$1 2). Demand = Stock = S 3). Hence: R = (S/α1E)–1/ β1 {downward sloping schedule}
  • 10. MIT Center for Real Estate 2nd and 3rd Quadrants 4). P = R/i i = all inclusive cap rate 5). Office Construction rate: C/S = α2Pβ2 P = Asset Price per square foot [“Q” theory?] β2 = Price elasticity of supply: [% change in construction rate/% change in price]
  • 11. MIT Center for Real Estate 4th Quadrant 6). Replacement version (graph): E= fixed, δS = building losses ΔS/S = C/S - δ [Construction rate – loss rate equals net additions = 0 in equilibrium] 7). Steady Demand growth version: ΔE/E = δ, no losses Hence: ΔS/S - ΔE/E = C/S - δ [what happens to S/E if C/S >< δ ?]
  • 12. Effect of Demand Growth in Space Market: More MIT Center for Real Estate Jobs Asset Market: Rent $ Space Market: Valuation Rent Determination D0 D1 R* Price $ P* Q* Stock (SF) C* Asset Market: Construction Space Market: Stock Adjustment Construction (SF)
  • 13. Effect of Demand Growth in Space Market: First phase… MIT Center for Real Estate Rent $ Space Market: Asset Market: Rent Determination Valuation D0 D1 Doesn’t form a rectangle. R* Excess (negative) vacancy… Price $ P* Q* Stock (SF) C* Asset Market: Construction Space Market: Stock Adjustment Construction (SF)
  • 14. Effect of Demand Growth in Space Market: 2nd phase… MIT Center for Real Estate Asset Market: Rent $ Space Market: Valuation Rent Determination D0 D1 R1 Rents spike and get rid of excess (negative) vacancy R* Price $ P1 P* Q* Stock (SF) Can this be a long- run equilibrium result?… C* Asset Market: Doesn’t form a Construction rectangle. Space Market: Stock Adjustment Construction (SF)
  • 15. Effect of Demand Growth in Space Market: LR Equilibrium… MIT Center for Real Estate Asset Market: Rent $ Space Market: Valuation Rent Determination D0 D1 R1 R** R* P** Price $ P1 P* Q* Q** Stock (SF) In long run equilibrium new supply tempers C* initial rent spike Asset Market: Construction C** Space Market: Stock Adjustment Construction (SF)
  • 16. Effect of Demand Growth in Asset Market… MIT Center for Real Estate Asset Market: Rent $ Space Market: Valuation Rent Determination D0 11% CAP D1 R* 8%CAP R** SR LR P1 Q** P* Q* Price $ P** Stock (SF) C* Asset Market: Construction Space Market: C** Stock Adjustment Construction (SF)
  • 17. MIT Center for Real Estate Using the 4-Quadrant Model to assess the impact of other changes. • What happens if Construction costs rise or the supply schedule shifts? • Suppose depreciation speeds up (functional obsolescence dictates shorter life spans of buildings)? • How to interpret owner occupied space (e.g. Single Family Housing)? • EXERCISE #1.
  • 18. MIT Center for Real Estate Current Issues: using the diagram • Zero (or negative) population and labor force growth in: Japan, Germany, Italy, Spain…? • Increasing use of the Internet for retail shopping? • Expanded availability of (subprime) mortgage credit to households previously ineligible? • Continued global saving glut from growth in Asia – where savings rates are 20%+
  • 19. MIT Center for Real Estate Real Estate Macro-economics: Real Estate Cycles and Secular Trends • What are real estate cycles? Truly independent oscillations or just reactions to the economy. • Cycles vary with Property type. • Cycles are related to broader capital markets. • Secular trend: growth rates of the stock (construction) slow as economy matures. • Secular trend: Prices adjusted for inflation rise over time?
  • 20. MIT Center for Real Estate Prefect Historic correlation between economic recessions and Housing Production – except for the last 5 years 5 3.2 Year-over-year change in total 4 2.8 employment, millions Total housing starts, 3 2.4 millions of units 2 2.0 1 1.6 0 1.2 -1 0.8 -2 0.4 -3 0.0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 New Jobs (L) Total Housing Starts (R) Sources: BLS, BOC, TWR.
  • 21. MIT Center for Real Estate Prefect Historic correlation between economic recessions and Housing Prices – except for the last 5 years Housing and U.S. Job Growth 6% 12% 5% 10% 4% 8% real median home prices 6% 3% 4% job growth 2% 2% 1% 0% 0% -2% -1% -4% based on 4-qtr -2% moving averages -6% -3% -8% 1 20 Q3 20 Q1 20 Q3 19 Q1 19 Q3 19 Q1 20 Q3 20 Q1 19 Q3 19 Q1 19 Q3 19 Q1 19 Q3 19 Q1 19 Q3 19 Q3 19 Q3 19 Q1 19 Q1 19 Q3 19 Q3 19 Q3 19 Q1 19 Q1 19 Q1 Q 04 05 07 95 96 98 99 01 02 87 89 90 92 93 80 81 83 84 86 69 71 72 74 75 77 78 19 Job Grow th Real Median Home Price Grow th (lagged)
  • 22. MIT Center for Real Estate With offices, building booms follow rents. The booms then generate falling rents = endogenous cycle? Office construction and rent growth (TWR sum of markets) 140 15 Forecast 120 Completions - 10 Historical average 100 5 80 60 0 40 -5 20 0 -10 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Completions in msf (L) TWR rent inflation in % (R) Figure by MIT OpenCourseWare.
  • 23. MIT Center for Real Estate National Office Market Completions Rate vs. Real Rent $ Per Sqft Forecast 34.00 8.00% 32.00 6.00% 30.00 28.00 4.00% 26.00 2.00% 24.00 0.00% 22.00 -2.00% 20.00 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Total Employment Growth (L) Real Rent (R) Completion Rate (L)
  • 24. MIT Center for Real Estate Historically: Rents over the “cycle” mean revert around Development costs PPI: Construction TWR Rent Index 200 31 190 29 180 27 170 25 160 150 23 140 21 130 19 120 110 17 100 15 20 1 20 1 1 19 1 19 1 20 1 20 1 20 1 20 1 20 1 20 1 20 1 19 1 19 1 19 1 19 1 19 1 19 1 19 1 19 1 19 1 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 06 07 08 99 03 04 05 00 01 02 91 92 93 94 95 96 97 98 88 89 90 19 PPI: Construction Materials and Components TWR Rent Index Source: BLS, TWR Office Outlook XL, Summer 2008
  • 25. MIT Center for Real Estate Over the long run there also are: little cycles and Big cycles Broken Ground Projects Construction as % of Stock 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% 1901 1910 1919 1928 1937 1946 1955 1964 1973 1982 1991 2000 Downtown Suburban
  • 26. Price Index 16 0 50 100 150 200 250 300 350 400 28 16 38 16 48 16 58 16 68 16 78 16 88 16 98 17 08 17 18 17 28 17 38 g 17 48 17 58 17 MIT Center for Real Estate 68 y 17 78 17 88 17 98 18 08 Y ear 18 18 18 28 18 38 18 48 18 58 18 68 ( 18 78 18 88 18 98 19 g 08 19 18 19 Amsterdam (Real Guilders) 28 ) 19 38 19 48 19 58 Index of Historic Housing Prices in 19 68
  • 27. MIT Center for Real Estate CPI Apartment Rent Indices for Selected "traditional" Cities: 1918-1999 (constant $) 400 350 300 Apartment Rent 250 200 150 100 50 0 1918 1921 1924 1927 1930 1933 1936 1939 1942 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 Year NEW YORK BOSTON CHICAGO WASHINGTON D. C. SANFRANCISCO
  • 28. MIT Center for Real Estate Long run Appreciation? Just inflation (3.5%) for 100 years in NYC, but lots of decade risk Price Index 1899 = 1.0 constant dollars/square ft. 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 Source: MIT 2002 Thesis
  • 29. MIT Center for Real Estate Real Estate Micro-economics: Cities and Land Markets • No two properties are identical [complete product differentiation] • Properties are close if not perfect substitutes for each other – at some price differential. • Price differentials are extremely large, and very predictable. • Price differentials tend to be stable over time: local neighborhoods do not have independent cyclic movements.
  • 30. MIT Center for Real Estate House prices reflect both unit characteristics and location attributes 17.19 In(sale) 8.52 5.71 In(sqrt) 9.34 Sale amount against square feet, Phoenix Figure by MIT OpenCourseWare.
  • 31. MIT Center for Real Estate Repeat-Sale House price indices (CSW) for 15 submarkets within the greater Boston CMSA: 1982-2002 (current $) House Price Indexes, Eastern M assachusetts, by City/Tow n Location 300 250 Boston Southeast W estern 1 200 Far North Shore Price Index (1990=100) 495 North 95 South 95 N orth 150 W estern 2 Lowell Area 495 W est North Shore 100 South Shore W orcester Area Cam bridge Area North Central 50 0 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year
  • 32. MIT Center for Real Estate Home Prices within South California Median Home Price, Thousands ($ 2002.4) $400 $350 $300 $250 $200 $150 $100 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 Los Angeles Orange County Riverside Ventura San Diego Sources: OFHEO, Torto Wheaton Research
  • 33. MIT Center for Real Estate Office Rents Move together Cyclically but not always secularly TW Rent Index, 2003$ per sqft 40 Forecast 35 30 25 20 15 1980 1981 1982 1983 1985 1986 1987 1988 1990 1991 1992 1993 1995 1996 1997 1998 2000 2001 2002 2003 2005 Los Angeles Orange County Ventura County Riverside San Diego
  • 34. MIT Center for Real Estate Closely Correlated Industrial Rent Movements: few secular differences TW Rent Index, 2003$ per sqft 10.00 Forecast 9.00 8.00 7.00 6.00 5.00 4.00 1980 1981 1983 1984 1986 1987 1989 1990 1992 1993 1995 1996 1998 1999 2001 2002 2004 2005 Los Angeles Orange County Ventura County Riverside San Diego
  • 35. MIT Center for Real Estate Manhattan Office Rents vs. NJ and Conn. Suburbs TW Index, $2002 per sqft 65 60 55 50 45 40 35 30 25 20 1980 1981 1982 1983 1985 1986 1987 1988 1990 1991 1992 1993 1995 1996 1997 1998 2000 2001 Suburban Markets Manhattan
  • 36. MIT Center for Real Estate Office Suburban Rents in Detail TW Index, $2002 per sqft 50 45 40 35 30 25 20 15 10 1980 1981 1982 1983 1985 1986 1987 1988 1990 1991 1992 1993 1995 1996 1997 1998 2000 2001 Northern New Jersey Long Island Stamford Westchester
  • 37. MIT Center for Real Estate Prices and Development • Prices bring forth development: of any urban land use.. • Development occurs so as to maximize the residual value between: Price-capital costs (construction). • This residual is “land value”. Development maximizes land value. • Land Development is a natural real option: incur heavy capital costs to realize an income stream – or- wait (to do the same later) ?
  • 38. MIT Center for Real Estate What is a real Estate Market? • Within “markets” all properties should move together: high substitutability, easy mobility. • Between markets there exists frictions, transportation costs, immobility of resources and low substitutability. • MSA as “market”? CMSA?
  • 39. MIT Center for Real Estate Between Markets – there can be huge differences in both long term growth and cyclic risk 1 9 8 0 = 1 0 0 (C o n s ta n t $ 2 0 0 5 ) 350 300 B o s to n 250 Los A n g e le s 200 Ch ic a g o 150 Na tio n 100 Da lla s 50 0 1980 1985 1990 1995 2000 2005
  • 40. MIT Center for Real Estate Metropolitan Housing Markets can even move independently FIGURE 5. Repeat Sale House Price Indices for Selected "new" Cities: 1975-1999 (constant $) 250 230 210 190 170 House Price 150 130 110 90 70 50 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 Year Atlanta Dennver Houston Los Angeles Phoenix
  • 41. MIT Center for Real Estate Although sometimes they are subject to a common economy wide Shock FIGURE 4. Repeat Sale House Price Indices for Selected "Traditional" Cities: 1975-1999 (constant $) 250 230 210 190 170 House Price 150 130 110 90 70 50 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 Year Boston Chicago New York Sanfrancisco Washington D.C.