Module 2:Four Quadrant model

Real estate is multiple markets, what is a builing simultaneously (2)

• Place to use

• Asset to own

The space market is where ___are determined and the asset market is where ___ are determined

Say what yk about:

-Demand

-Supply

-User Market price

What is market equilibirum?

-Buyers are satisfied with…

-Sellers are satisfied with

-Market clears mean?

-If demand>supply?

-If demand<supply?

Is the state where no one has an incentive to change their behaviour given the current prices and constraints

Explain consumer surplus and producer surplus in a market with no distortions, an equilibrium prime and the quantity optimizes total welfare

• What three spaces (supply) of the real estate market are there

• The point at which we reach equilibrium determines what three items(rsv)

• Explain how the system restores equilibrium, start with, ”High demand for housing…”

What makes the property market different than other commodity markets when it comes to reaching an equilibrium

Slow to adjust in two ways

Real estate markets follow macroeconomic/microeconomic logic in terms of equi. price being set where demand meets supply

Microeconomic

What two features make property markets distinct

What are the blanks

Briefly the 4 submarkets

• User market

• Financial asset market

• Development market

• Stock Adjustment market

Quadrant 1:User Market

• What’s the rationale behind determining rent

• Given fixed stock and demand increases/decreases what happens

• High rents=Low demand for space,Low rent=High demand for space

• Increases=rentals increases,Decreases=Rentals decrease as suppliers now compete,who can give the lowest rental so tenants move into their properties

Quadrant 1:

What are demand drivers,name the biggest one first(5)

• GDP

• Employment

• Household formation

• Business investment

• Locational preferences

Quadrant 2:

-Define cap rate

-How is it calculated and expressed

-Who decides the cap rate

-a real estate metric that estimates the expected yearly return on an income-producing property

-Cap Rate = Net Operating Income (NOI) ÷ Current Market Value (or Price)-exprssed as a %

-Collective real estate market(no singular person) based on based on recent comparable sales, prevailing economic conditions, and investor demand

How to calculate value and what three things drive the cap rate

• Rates

• __ Growth

• Risk

Explain this slide:

• Whats the risk

• Whats the return

• What does each number mean

• Risk can include,tenants not paying, building becoming obsolete ,interest rates increasing,location becoming undesirable

• Return is what you get back from the building every year(could be rent) until you have earned the same amount of money as the OG value you got the building at

• 100k is the rent,8%Cap rate,1.25mil is the value of the building

What’s the relationship with risk and cap rates and the relationship with interest rates and cap risk

• The higher the risk of the builiding, the higher the cap rate,in order to get your return quicker to avoid the risks. The lower your risk,the lower your cap rate meaning you’re willing to wait longer to get all your returns as it is highly likely you’ll get it

• Higher interest rates bring property prices down because they increase borrowing costs, reducing buyer demand and forcing sellers to lower their price to attract the remaining individuals willing to pay. Cap rates become higher because this is considered a risk, as investors might not get their full return

Quadrant 2:

What causes movement along the line and what causes a pivot

• Movement along the line is when NOI increases,which in turn increases value of the building

• Pivot (downwards)is when the CAP rate increases,showing an increase in risk in the building

Quadrant 3:

What is the rationale behind this Development market

(Hint: Financial market)

• When capital values are higher than costs this triggers new construction

• So when prices increase in financial market in Q2,new construction is trigged as projects are more feasible

Quadrant 3:

• When does less development happen

• What slows down construction (3)

• When two of things are equal no construction happens

• When replacement value(construction costs) are higher than value

• Longer zoning and building approval times, higher interest rates and increase in marital costs

• Property value=Construction costs(replacement value)

Quadrant 4:

What’s the rationale for the stock market and what new thing does it create

• The more space you build,the gretaer the total amount of stock in the market

• New market equilibirum

Quadrant 4:

When will gradient of the line change (2 things at play here)

• Relationship between new stock production and degradation of existing stock changes

What 3 things can cause,degradation,depreciation and obsolescence

• How does the 4 quadrant model work (Clockwise/anti-clockwise)

• Name the 2 main quadrants,4 sub-quadrants and the 4 axis

*Shocks don’t necessarily mean that it’'ll affect the 1st quadrant first

Quad one can also be user market

Quad 2 financial

Quad 3 development

Execercise:

What happens in diagram

-GDP rises and firms expand

-Interest rates fall

• Whats the missing quadrant and where does its outcome derive from

• Land Market,outcome is from activity in developemt market

Demand for land slope is ____ why?

-Cheaper land,value…

-Lower prices lift…

Supply of land slope is____ Why?

-Higher prices

-Not markets alone (3 things shape it)

• What shifts the Demand curve outward,and what moves price along the line

• Why does elasticity decide the outcome

The 4-Quadrant model is a long run, comparative-static device what 6 things does it not tell us

-Short-run

-Dimension

-Behavioral f___

-Heterogeneity

-Institutions

-Credit &Risk

Why would we want institutions to also be endogenous outcomes