RE 420 Module 1
If the cap rates prevailing in a given market are 10.5%, then how much would you expect a property to sell for in that market if its annual net income were $50,000?
$476,190.
If it costs $300/SF to develop a new class A office building and the annual net rent for office space is $22.5/SF, what is the cap rate that would make additional development feasible?
22.5/300= 7.5%
The term "real property" refers to:
Land or built space.
The basic geographic unit in real estate space markets is typically
The metropolitan area (MSA)
Other things being equal, which would have the lowest cap rate?
A building with long-term leases in a growing market.
The "kink point" in the real estate space supply function occurs at:
The current quantity of built space and the "replacement cost" rent
What would be the 'short-term' effect of an increase in demand for space usage on rent?
rent would go up
What would be the 'short-term' effect of an increase in demand for space usage on new development?
new development would increase
What would be the 'short-term' effect of an increase in demand for space usage on price of real estate assets?
price of real estate assets would go up
It costs $300/SF to develop a new class A office building and the annual net rent for office space is $22.5/SF. If office buildings are currently selling at an 8% cap rate, what would be the replacement cost rent level?
replacement cost=.08*300=$24/SF
Real estate space markets are segmented for all of the following reasons except: (a) Space users require specific locations and types of buildings. (b) Built space is fungible. (c) Buildings cannot move. (d) It is difficult and expensive to change buildings from one usage type to another (e.g., from office to apartment).
(b) Built space is fungible.
What would be the implications of a collapse of the commercial real estate debt market in the U.K. for the office market in London?
Commercial real estate prices will go down
Which statement below is true? (a) The supply side of the space market consists of investors. (b) The demand side of the space market consists of investors. (c) The supply side of the space market consists of potential tenants. (d) The demand side of the space market consists of potential tenants.
The demand side of the space market consists of potential tenants.
what is the 'replacement cost' level of rent?
The level of rent that is just sufficient to stimulate profitable new development in the market
Long-run equilibrium in a DiPasquale-Wheaton "Four-Quadrant Model" (4QM) is found by:
The rectangle with vertical sides and horizontal top & bottom whose four corners just touch the four binary relationship lines in each quadrant.
Is the collapse of Lehman Brothers the linchpin of the Great Recession?
No, it is not. The collapse in residential investment was in full swing in 2006, a full two years before the collapse of Lehman Brothers
Which of the following is an example of the private equity market?
The commercial real estate property asset market.
The liquidity trap occurs when
When the real interest rate is zero??? check
How can the US pay its debt?
Taxes Printing money. Doesn't this inflate debt even more? TIPS (Treasury Inflation-Protected Securities) US nominal bonds Creating new bonds to pay down debt
What does financial theory predict on an increase in bond yields for the cap rate in London:
The cap rate will increase
post the great recession, growth rates have been roughly how much of that normally observed in expansions?
half
Equilibrium between current supply and demand in the space market is reflected by:
The prices (rents) and occupancy observed in the market.
Suppose demand for apartments in a metropolitan area is: #Apt.units=60,000 +(0.30)(# households)-(80)*($Rent/unit/mo.) If developers increase the number of apartment units from 88,000 to 100,000, over a period of several years, to what level will real rent fall in the market below the original $400/mo level if the population remains stable at 200,000 households?
250 -100,000 + 60,000 + 0.3 * 200,000/80=250
Suppose demand for apartments in a metropolitan area is: #Apt.units=60,000 +(0.30)(# households)-(80)*($Rent/unit/mo.) The number of apartment units remained at 88,000 while the number of households grew from 200,000 to 220,000. To what level would real rents rise?
475 -88,000 + 60,000 + .3*220,000/80
If properties in a certain market are typically selling for prices of $100/SF and they are yielding current annual net income of $8/SF, then the typical "cap rate" prevailing in this market is:
8%
In the absence of foresight among asset market participants, a growth in demand for real estate assets in the capital market, holding demand in the space usage market constant, will produce which of the following short-run and long-run effects?
A short-run increase in property asset prices followed by a subsequent drop
Why would rents fall in the UK if the UK is not able to guarantee similar free-trade conditions than the ones currently in effect with the European Union?
Absence of free-trade agreements means more tariffs and deadweight losses, so London-based companies prefer to relocate to other European capitals and not pay these taxes
what is a segmented market?
Because both supply and demand are location and type specific, real estate space markets are highly segmented. That is, space markets tend to be local rather than national, and specialized around building usage categories. This is in contrast to nationally integrated markets for homogeneous commodities
The EUR/USD cross-currency basis (β in terms of our notation) ) reflects the premium that owners of dollars demand for lending their dollars to international banks. When β>0, we say that the Covered Interest-rate Parity (CIP) formula does not hold. This was the case, for example, of the large deviation of the EUR/USD cross-currency basis in October 2008. As we discussed in class, this departure from the CIP was due to
European banks' difficulties to roll over their US dollar denominated loans, which grew to more than $800 billion by mid-2007
Before Brexit, the Governor of Bank of England, Mark Carney, said that if the "leave" option wins, the return that investors would demand for holding longer-term U.K. government debt—or the term premium—would rise. In the same line, analysts at BlackRock said in a report on Brexit that a 'leave' vote would likely increase gilt yields. What was the economic intuition behind this forecast?
Higher yield is a consequence higher uncertainty/risk and investor's decision to reallocate their investments towards other regions outside the UK
In order for the real estate system to function more efficiently and effectively, it is important for:
Investors to try to forecast the economy, the space market, development activity, and the capital market.
Suppose the economy has been growing, but at some point, for some reason - overbuilding, high interest rates, aliens from outer space, whatever - housing investment tanks. Make an economic reasoning that relates this bad news to a fall in overall consumption, GDP, RRE consumption, CRE consumption, and employment.
Less housing investment decrease house prices. Consumers decide to consume less and save more, in part because the value of their main asset that can be put as collateral in a mortgage decreased, and in part because they have precautionary motives. Because in the U.S., private consumption is the biggest chunk of GDP, usually comprising 65-70 percent of the dollar value in a given year or quarter, less consumption means a lower GDP. Firms sell less so they decide not to hire new workers and not to sign new leases for commercial real estate. So unemployment increases and commercial real estate prices fall
what is a MSA?
MSAs, short for "metropolitan statistical areas", encompass a central city and its surrounding suburbs. Since an MSA tends to be relatively integrated economically, culturally, and socially, it is often used as the primary geographic units of space market segmentation in real estate.
One week after the vote, the yield on 10-year British government bonds, called gilts, fell to 0.87%, their lowest levels in modern history. Some analysts correctly forecast gilt yields would fall, because:
domestic investors would seek a haven for cash and international investors would buy bonds in anticipation of the Bank of England cutting the interest rate. Although typically a higher yield is associated to higher uncertainty, bonds yields decreased due to such unexpected high demand for UK bonds.
post "Great Recession" recovery has been
long and shallow
The EU has developed an internal single market through a standardized system of laws that apply in all member states. EU policies aim to ensure
the free movement of **people, goods, services, and capital within the internal market, enact legislation in justice and home affairs, and maintain common policies on trade, agriculture, fisheries, and regional development** A monetary union was established in 1999 and came into full force in 2002, and is composed of 19 EU member states which use the euro currency.
Which are the two fundamental markets in commercial real estate?
The space market and the asset market.
The "real estate system" consists of the following three major components:
The space market, the asset market, and the development industry.
The rating agencies rated the CDOs like they were what?
truly diversified -giving the impression that these derivatives were based on a bundle of different kinds of mortgages with geographic diversification that would not all topple together.
In a real estate market. "constrained supply", or rising real Long-Run Marginal Cost (upward-sloping supply curve), is generally caused by:
Scarcity of buildable land due to geographic or regulatory constraints.