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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.
Private Construction Buildings Residential buildings Nonresidential buildings Industrial Office Hotels/Motels Other commercial All other nonresidential Nonbuilding construction Public utilities All other Public Construction Buildings Housing and development Industrial Other Nonbuilding construction Infrastructure All other Total new construction Total GDP:
6.1 4.0 1.6 0.2 0.4 0.1 0.5 0.4 0.5 0.1 2.0 1.0 0.1 0.0 0.9 1.0 0.9 0.1 8.1 100.0
Source: Current Construction Reports, Series C30, U.S. Census Bureau. Gross Domestic Product from Economic Report of the President, 2004
5,419 552 96 55
Nonresidential
2,655
30.2
8,777
100.0
$, in billions Individuals Corporations Partnerships Nonprofits Government Institutional Investors Financial Institutions Other (Including Foreign 5,088 1,699 1,011 411 234 128 114 92
Total:
8,777
100.0
6,122
100.0
2,655
100.0
100.0
69.8
30.2
Rent $
Asset Market: Valuation
D
Space Market: Rent Determination
R* D
Price $
P*
Q*
Stock (SF)
C*
Asset Market: Construction Space Market: Stock Adjustment
Construction (SF)
1st quadrant 1). Office Demand = 1ER-1 E= office employment R = rent per square foot 1 = rental elasticity of demand, %change in sqft per worker/% change in rent] 1 = sqft / E when R=$1 2). Demand = Stock = S 3). Hence: R = (S/1E)1/ 1 {downward sloping schedule}
2nd and 3rd Quadrants 4). P = R/i i = all inclusive cap rate 5). Office Construction rate: C/S = 2P2 P = Asset Price per square foot [Q theory?] 2 = Price elasticity of supply: [% change in construction rate/% change in price]
4th Quadrant 6). Replacement version (graph): E= fixed, S = building losses S/S = C/S - [Construction rate loss rate equals net additions = 0 in equilibrium] 7). Steady Demand growth version: E/E = , no losses Hence: S/S - E/E = C/S - [what happens to S/E if C/S >< ?]
Effect of Demand Growth in Space Market: More Jobs Space Market: Rent Determination
Rent $ D1
D0
R*
Price $
P*
Q*
Stock (SF)
C*
Asset Market: Construction Space Market: Stock Adjustment
Construction (SF)
Rent $
D0
D1
C*
Asset Market: Construction Space Market: Stock Adjustment
Construction (SF)
Rent $
R1
D0
R*
Price $
P1
P*
Q*
C*
Asset Market: Construction Space Market: Stock Adjustment
Construction (SF)
Effect of Demand Growth in Space Market: LR Equilibrium Space Market: Rent Determination
R1 R** R*
D0
D1
P** Price $ P1 P* Q* Q** Stock (SF) In long run equilibrium new supply tempers initial rent spike
C*
Asset Market: Construction
C**
Construction (SF)
Rent $
D0 D1
11% CAP
R* 8%CAP
R**
SR
P1 Price $
LR
Q**
P* Q*
P**
Stock (SF)
C*
C**
Construction (SF)
Prefect Historic correlation between economic recessions and Housing Production except for the last 5 years
5 Year-over-year change in total employment, millions 4 3 2 1 0 -1 -2 -3 3.2 2.8 2.4 2.0 1.6 1.2 0.8 0.4 0.0 Total housing starts, millions of units
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)
Prefect Historic correlation between economic recessions and Housing Prices except for the last 5 years
Housing and U.S. Job Growth
6% 5% 4% 3% job growth 2% 1% 0% -1% -2% -3%
69 19 Q3 71 19 Q1 72 19 Q3 74 19 Q1 75 19 Q3 77 19 Q1 78 19 Q3 80 19 Q1 81 19 Q3 83 19 Q1 84 19 Q3 86 19 Q1 87 19 Q3 89 19 Q1 90 19 Q3 92 19 Q1 93 19 Q3 95 19 Q1 96 19 Q3 98 19 Q1 99 20 Q3 01 20 Q1 02 20 Q3 04 20 Q1 05 20 Q3 07 Q 1
12% 10% 8% 6% 4% 2% 0% -2% based on 4-qtr moving averages -4% -6% -8% real median home prices
19
Job Grow th
With offices, building booms follow rents. The booms then generate falling rents = endogenous cycle?
140 120 100 80 60 40 20 0 -5 Office construction and rent growth (TWR sum of markets) Forecast Completions Historical average 10 15
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-10
34.00
8.00% 32.00
6.00%
30.00
4.00%
28.00
-2.00% 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
20.00
Historically: Rents over the cycle mean revert around Development costs
PPI: Construction
200 190 180 27 170 160 150 140 130 19 120 110 100
19 88 Q 19 1 89 Q 19 1 90 Q 19 1 91 Q 19 1 92 Q 19 1 93 Q 19 1 94 Q 19 1 95 Q 19 1 96 Q 19 1 97 Q 19 1 98 Q 19 1 99 Q 20 1 00 Q 20 1 01 Q 20 1 02 Q 20 1 03 Q 20 1 04 Q 20 1 05 Q 20 1 06 Q 20 1 07 Q 20 1 08 Q 1
25 23 21
17 15
Over the long run there also are: little cycles and Big cycles
Construction as % of Stock
Downtown
Suburban
50
16 16 16 16 16 16 16 17 17 17 17 38 48 58 68 78 88 98 08 18 28 38 48 58 68 78 18 18 19 19 19 19 19 19 19 88 98 08 18 28 38 48 58 68 17 17 17 17 17 17 18 18 18 18 18 18 18 18 28 18 08 98 88 78 68 58 48 38
28
Y ear
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
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
17.19
In(sale) 8.52 5.71 In(sqrt) Sale amount against square feet, Phoenix 9.34
Repeat-Sale House price indices (CSW) for 15 submarkets within the greater Boston CMSA: 1982-2002 (current $)
House Price Indexes, Eastern M assachusetts, by City/Tow n Location
300
250 Boston Southeast W estern 1 Far North Shore 495 North 95 South 95 N orth W estern 2 Lowell Area 495 W est North Shore South Shore W orcester Area Cam bridge Area North Central
200
150
100
50
0 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Thousands ($ 2002.4)
Los Angeles
Orange County
Riverside
Ventura
San Diego
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
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
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
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
Long Island
Stamford
Westchester
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
B o s to n
300
250
200
Los A n g e le s Ch ic a g o Na tio n
150
100
Da lla s
50
House Price
House Price