Real Estate Ch. 1: The Nature of Real Estate and Real Estate Markets

The capital markets can be divided into two broad categories:

1. Equity interests 2. Debt interests

The two primary characteristics of real estate assets

1. Heterogeneous 2. Immobile

What role do local property (asset) markets play? (2)

1. Property markets allocate available property investments among competing investors 2. Local property markets determine the pace of new construction

An acre is defined as _____ square feet

43,560

There are _____ acres in one square mile

640

Required investment returns =

(the risk-free rate in the economy) + (a risk premium that reflects how reliable or uncertain the forecasted net operating incomes are)

Real estate is the source of nearly _____ percent of local government revenues

70

Debt/lenders in private markets

banks thrifts insurance companies finance companies private lenders

Equity participants in capital markets are viewed as the _____

owners of the real estate

Tangible assets include both _____ and _____ property

real; personal

Real estate markets tend to be localized. By this we mean

that the potential users of a property, and competing sites, generally lie within a short distance of each other ex: the market for a neighborhood shopping center is very localized

Improvements TO the land include...

the components necessary to make the land suitable for building construction or other uses

Real estate: a tangible asset

When viewed as purely a tangible asset, real estate can be defined as the land and its permanent improvements

Debt/lenders in public markets

commercial mortgage-backed securities (CMBS) mortgage REITs

Heterogeneous

each property has unique features ex: gasoline

Since real estate assets are heterogeneous and immobile, the market for buying, selling, and leasing real estate tends to be

illiquid localized highly segmented with privately negotiated transactions and high transaction costs

Equity/owners in private markets

individuals partnerships limited liability corporations private equity funds hedge funds

Real property

interchangeable with the word "real estate"

Larger, more valuable commercial properties, generally well over $10 million, are often referred to as _____

investment-grade properties or institutional-grade real estate

Real estate constitutes the _____ asset class in the US

largest

The primary participants in user markets are the potential _____

occupants, both owner occupants and tenants, or renters

A primary determinant of the feasibility of new construction is the _____

relationship between the current level of property prices and the cost of new construction

Property markets determine the _____

required property-specific investment returns, property values, capitalization rates, and construction feasibility

Locational differences are particularly critical for _____ properties

retail

Within the capital markets, the _____ investors require for a broad range of available investment opportunities, including real estate, are determined.

returns

Participants in the capital markets invest in _____ with the expectation of _____

stocks, bonds, mutual funds, private business enterprises, mortgage contracts, real estate, and other opportunities receiving a financial return on their investment

Real estate typically generates over _____ percent of U.S. GDP

25

Real estate user markets

characterized by competition among users for physical locations and space

The value of a bundle of rights is a function of the property's _____ characteristics.

physical (age, size, design, etc.) locational (convenience) and legal

Real estate is anything that can be owned or possessed, or _____

property

Personal property

refers to things that are movable and not permanently affixed to the land

Real estate professions

1. Brokerage, leasing, and property management services 2. Appraisal and consulting services 3. Site selection, acquisition, and property development 4. Construction 5. Mortgage finance and securitization 6. Corporate and institutional real estate investment 7. Government activities (planning, land use regulation, environmental protection, and taxation)

The national government influences real estate in many ways

1. Income tax policy can greatly affect the value of real estate and therefore the incentive to invest in it 2. Housing subsidy programs can have enormous effects on the level and type of housing construction 3. Federal flood insurance programs can influence development in coastal and wetlands regions 4. Federal financial reporting and disclosure requirements, and government-related financial agencies all have profound effects on the operation of the real estate capital markets 5. Consumer protection laws affect few aspects of household activity more than they impact housing purchases and financing 6. Laws protecting the environment and endangered species have significantly affected the use of real estate 7. National fair housing laws and other civil rights legislation are very important influences on housing markets

Local government has perhaps the largest influence on real estate for what reasons?

1. It affects the supply and cost of real estate through zoning codes and other land use regulations, fees on new land development, and building codes that restrict methods of construction 2. Affects rental rates in user markets through property taxes 3. Affects the supply and quantity of real estate by its provision of roads, bridges, mass transit, utilities, flood control, schools, social services, and other infrastructure of the community

Real estate is used in three fundamental ways

1. Its most common use is to identify the tangible assets of land and buildings 2. It is used to denote the "bundle" of rights associated with the ownership and use of the physical assets 3. May be used when referring to the industry or business activities related to the acquisition, operation, and disposition of the physical assets

State government has perhaps the least effect on real estate values, but why is it still important?

1. Through the licensing of professionals and agents, states constrain entry into real estate-related corporations 2. Through statewide building codes, they can affect building design and cost 3. Through disclosure laws and fair housing laws, states affect the operation of housing markets 4. States typically set the basic framework of requirements for local government land use controls, and even intervene in the realm of land use controls for special purposes such as protection of environmentally sensitive lands 5. States affect the provision of public services important to a community, including schools, transportation systems, social services, law enforcement, and others

What determines the current rental rates and the expected cash flows of a property? (2)

competition for space, coupled with the existing supply of leasable space, determines current rental rates (let's call this a space market equilibrium) and the expected cash flows (net operating incomes) of a property

The riskiness of the expected cash flows depends on the _____ (3)

degree of uncertainty about future space demand, future space supply, and the resulting future space market equilibriums

Capital markets provide the financial resources necessary for the _____ of real estate assets

development and acquisition

What do we mean when we say that real estate markets tend to be highly segmented?

households that search for single-family detached units in the market will generally not consider other residential product types such as an attached townhouse unit or condominium

Debt participants in capital markets are viewed as the _____

lenders

Property can be tangible or intangible. Tangible assets are _____ things; intangible assets are _____ things

physical (such as cars, clothing, land, etc.) nonphysical (contractual rights, financial claims, interests, patents, or trademarks)

Equity/owners in public markets

publicly traded real estate investment trusts (REITs) real estate companies

Real estate construction historically has been a _____ process

volatile because real estate prices and costs tend to be volatile construction costs can be very volatile real estate values can also be affected by shocks to the capital markets (ex: interest rate ^ ; property values V)

Real estate: a "bundle" of rights

These rights are to the services, or benefits, that real estate provides to its users Ex: real property provides its owners with the rights to shelter, security, privacy, as well as a location that facilitates business, etc.

Where is the demand for real estate derived from?

the need that individuals, firms, and institutions have for convenient access to other locations, as well as for shelter to accommodate their activities

Raw land

used to refer to a larger area that does not include any improvements

The capital markets serve to _____

allocate financial resources among households and firms requiring funds

Improvements ON the land include...

any fixed structures such as buildings, fences, walls, and decks

Capitalization rate

the ratio of a property's annual net income to its value a fundamental pricing metric in commercial real estate markets

In the interaction between user and capital markets, the expected stream of rental operating income for a particular property is capitalized into value through _____

"discounting," which is the process of converting expected future cash flows into present value. Discounting incorporates the opportunity cost of waiting for the uncertain cash flows

In an overbuilt market, what is required to push market rents and property values to their required levels?

a combination of reduced construction, normal growth in demand for space, and steady obsolescence of the existing stock