MIT Center for Real Estate

MIT Center for Real Estate Week 1: Introduction ã The space versus asset market: 4 Quadrant math. ã Real Estate Micro Economics: Hedonics, Location, density, government regulations. ã Real Estate Macro Economics: timing behavior (search,

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• Real Estate Macro Economics: timing

behavior (search, moving, contracts),

cycles, regional growth

MIT Center for Real Estate

• Service flow, “Shelter”, rent plus imputed rent [20% + of GDP]

• Land? Not part of GDP (we don’t make

land), but it is part of wealth

• Accounting, measurement difficulties [book versus market value]

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Residential Buildings 183 3.3 Housing and Development

Nonresidential Buildings 118 2.1 Industrial

All Other Nonresidential 21 0.4 All Other

Nonbuilding Construction 37 0.7 Total New Construction

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Adapted from DiPasquale and Wheaton (1996)

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U.S Real Estate

MIT C state

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

Adapted from DiPasquale and Wheaton (1996)

Exhibit 2-3: The DiPasquale-Wheaton 4-Quadrant Diagram…

Rent $

Stock (SF) Price $

Rent Determination Asset Market:

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• 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

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R = rent per square foot

[%change in sqft per worker/% change

in rent]

2) Demand = Stock = S

MIT Center for Real Estate

MIT Center for Real Estate

6) Replacement version:

E= fixed C= δS [Construction equals depreciation (δ is depreciation rate)]

7) Steady Demand growth version:

∆E/E = δ Hence: C= δS [what if S grows less or more than E?]

Exhibit 2-4a: Effect of 4a: Effect of Demand Growth in Space Market:

Rent $

Stock (SF) Price $

Exhibit 2-4a: Effect of Demand Growth in Space Market: 4a: Effect of Demand Growth in Space Market: First phase…

Rent $

Stock (SF) Price $

long-Doesn’t form a rectangle

Exhibit 2-4a: Effect of Demand Growth in Space Market: 4a: Effect of Demand Growth in Space Market: LR Equilibrium…

Rent $

Stock (SF) Price $

Exhibit 2-4a: Effect of Demand Growth in Space Market: 4a: Effect of Demand Growth in Space Market: LR Equilibrium…

Rent $

Stock (SF) Price $

Exhibit 2-4a: Effect of Demand Growth in Asset Market…

Rent $

Stock (SF) Price $

MIT Center for Real Estate

• 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 SFU housing)?

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National Multi-Housing Forecast

750.00 Forecast

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)

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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)

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MIT C state

U.S Single-Family Market

Appreciation

1990-91 1980-81

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MIT C state

Broken Ground

MIT Center for Real Estate

• 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

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House prices reflect both unit characteristics and

MIT C state

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W estern 1 Far North Shore

W orcester Area Cambr dge Area North Central

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Year

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Sources: OFHEO, Torto Wheaton Research

MIT Center for Real Estate

Office Rents Move together Cyclically but not

Office Rents Move together Cyclically but not

always secularly

TW Rent Index, 2003$ per sqft

MIT Center for Real Estate

Closely Correlated Industrial Rent Movements: few secular differences

TW Rent Index, 2003$ per sqft

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MIT C state

• 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) ?

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MIT C state

• Within “markets” all properties should move together: high substitutability, easy mobility

• Between markets there exists frictions, transportation costs, immobility of

resources and low substitutability

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MIT C state

Metropolitan Housing Markets

often move independently

2 83

184 185 186 1987 1988 1989 19

0 19

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