Real Estate Market Dynamics

1. Real Estate Market Dynamics 1

2. 2 Owner-Occupied Residential Real Estate Markets Basic supply/demand equilibrium model Supply – amount or quantity of the good or service that will be offered at various prices Demand – amount or quantity of the good or service that will be desired at various prices Equilibrium – the price/quantity combination at which quantity demanded equals quantity supplied

3. Demonstrating Market Dynamics Supply/Demand Equilibrium Demand Changes Price Supply Changes Price Simultaneous Supply and Demand Changes 3

4. Price Movements in Real Estate Space Markets The demand curve in real estate markets is downward-sloping. The supply curve in most real estate markets is vertical at the current quantity of space and horizontal at higher quantities. In a typical market, therefore, demand increases are unlikely to result in long-term price increases. Demand decreases, however, may lead to dramatic price decreases. 4

7. Retail Space Markets Freestanding retail Neighborhood center Community center Regional center Superregional center 7

8. Industrial Space Markets Warehouse Manufacturing/Production Materials processing 8

9. Agricultural Space Markets Annual (seasonal) cropland Perennial cropland Livestock grazing 9

10. Lodging Space Market Highway motels Convention/business hotels Luxury hotels Resort (destination) hotels Extended stay hotels/motels 10

11. Residential Space Market Single-family detached homes Single-family attached homes Manufactured homes Multifamily apartments See Close-Up “The Electronic Revolution’s Impact on the Value of Location” 11

12. 12 Real Estate Asset Market Transactions involving cash-flow rights to real estate Types of Capital Asset Markets and Investment Products

13. The Larger Market The real estate asset market is part of a larger market: Publicly traded equity assets (stocks, mutual funds, real estate investment trusts) Privately traded equity assets (real property, private companies, oil and gas partnerships) Publicly traded debt assets (bonds, mortgage-backed securities, money instruments) Privately traded debt assets (bank loans, whole mortgages, venture debt) 13

14. Price Determinants in the Real Estate Assets Market Opportunity of cost capital Growth expectations Risk 14

15. Tying Together Space & Assets Markets Prevailing economic conditions influence both capital and space markets Landlords and tenants negotiate rents, which produce cash flows of interest to the real estate asset market If cash flows are attractive more development is encouraged 15

18. Quantity of new construction completed – indicates new supply that is just arriving into the market

19. Absorption of new space – indicates the rate at which new supply is becoming occupied in the market17

21. If months supply is much greater than construction time for new projects, then the new project will likely hit the market at a time when supply exceeds demand

22. If months supply is equal to or less than construction time for new projects, then a new project will likely be well-received by the market.18

23. Professional Market Analysis Reports Office Lodging Industrial Apartments Owner-occupied residential 19