FIN 331 Blended Teaching

Physical attributes of real estate

Tangible characteristics of the property

Size of the building

Number of bedrooms and bathrooms (for residential properties)

Legal-political attributes of real estate

Legal and lease-related factors

Lease terms and tenant types

Rental rates influenced by location (e.g., downtown vs. secondary markets)

Linkage attributes of real estate

Describe how the property connects to the needs and behaviors of users or tenants

Proximity to complementary uses or customer bases (e.g., a toy retailer near families with children)

Accessibility and connectivity to transportation, amenities, or other relevant features

Dynamic attributes of real estate

Capture the level of activity or demand associated with the property

Number of visitors or customers attracted

Environmental attributes of real estate

External environmental factors that may affect property value, though they are less emphasized in initial market segmentation

Seller’s market

Sellers have the negotiating power.

Demand exceeds supply.

Prices tend to rise.

Buyers face limited options and pay higher prices

Buyer’s market

Buyers have the negotiating power.

Supply exceeds demand.

Prices tend to fall or stabilize at lower levels.

Buyers have many options and can negotiate lower prices

Neutral market

Supply and demand are balanced.

Prices remain relatively stable with minor fluctuations.

Lower risk environment for investors.

Job market

Economic driver of real estate

Job availability and economic growth strongly influence property values.

Economic downturns, such as plant closures, can cause significant property value declines (e.g., up to 40%).

Changing cities

Economic driver of real estate

Economic development and demographic shifts (e.g., migration to warmer climates) can boost demand and increase property values.

Regulations

Economic driver of real estate

External factors such as zoning laws, income tax policies, and regulatory changes also impact rental rates, vacancy rates, and overall market conditions

Space market

This is the physical market for real estate properties where supply and demand determine rents and property values. The availability and desirability of space influence how much tenants are willing to pay

Capital market

This market involves the flow of money available for investing or lending in real estate. Interest rates, which reflect the cost of capital, play a pivotal role here

Interest rates decrease

Borrowing is cheaper.

Demand for real estate increases.

Property values tend to rise

Interest rates increase

Borrowing becomes more expensive.

Demand for real estate decreases.

Property values tend to decline

Loan availability

Easier access to mortgages increases the number of potential buyers.

Interest rates

Higher borrowing costs reduce affordability, thereby decreasing demand.

Price sensitivity

As housing prices rise, fewer buyers can afford to purchase, dampening demand

Basic jobs

Export-oriented jobs that bring income into the local economy.

Examples include manufacturing plants like Boeing, which produce goods for global markets.

These jobs tend to be high-income and create demand for housing, retail, and office space

Non-basic

Service-oriented jobs that support the local population.

Examples include restaurants and retail stores.

These jobs depend on the disposable income generated by basic jobs.

Economic base multiplier

Quantifies the relationship between basic and total employment in a region

It measures how many total jobs exist for each basic job, reflecting the multiplier effect of basic jobs on the local economy

Multiplier effect

Helps estimate the total employment impact of new basic jobs, which in turn influences real estate demand

Location quotient

A tool used to classify jobs as basic or non-basic by comparing regional employment concentration to national employment patterns

LQ > 1

The industry is more concentrated regionally than nationally, indicating basic jobs

LQ < 1

The industry is less concentrated regionally, indicating non-basic jobs

Spatial markets

Physical characteristics of real estate

Because real estate is fixed in location, it forms spatial markets where location-specific factors heavily influence value and demand.

Real estate markets are inherently spatial due to fixed location.

Indivisible

Physical characteristic of real estate

Real estate is indivisible in its physical form, meaning it cannot be easily divided or subdivided without losing value or utility. This indivisibility results in high prices.

High prices act as barriers to entry for some market participants.

Durable

Physical characteristic of real estate

Lasting over long periods and consumed over time

This durability introduces the concept of path dependency, where historical development influences current and future markets

Inelastic supply

Physical characteristic of real estate

The supply of real estate is inelastic in the short term because development takes considerable time.

Instantaneous adjustments in supply are not possible.

Development timelines constrain market responsiveness.

Heterogeneous

Physical characteristics of real estate

Real estate is highly heterogeneous physically, meaning each property or unit is unique even within the same building.

Each apartment or unit has unique characteristics.

Physical heterogeneity necessitates individual property valuation.

This creates a role for professional appraisers and valuation experts.

Factor markets

Dual market characteristics

It is a market for a factor of production

Asset markets

Dual market characteristics

It is also a market for an asset

User market

Consists of firms renting space to produce goods and services.

Demand for space is a derived demand linked to the value of goods and services produced.

The user market serves as a proxy for how wider economic conditions influence demand for real estate space.

Rents paid in the user market become income for investors in the investment market.

Investment market

Influenced by income from the user market and by investors’ expectations about returns relative to alternative investments

Development market

Responds to signals from both the user and investment markets

Structure-Conduct-Performance paradigm

The structure of the market determines the conduct of the players

The conduct of the players influences market performance

Provide insights into the efficiency of allocations

Allocator efficiency

The market's ability to allocate scarce real estate resources effectively

Operational efficiency

Concerns the structure of the market and how well it accommodates the diverse objectives of its participants

Information efficiency

Addresses how well relevant information is incorporated into market prices

Efficient market hypothesis

Designed for capital markets with very different structures and higher information processing capabilities than real estate markets

Weak form efficiency

Information contained in past prices and returns is reflected in current prices

Semi-strong form efficiency

Relevant market signals are absorbed into prices

Strong form efficiency

No strategy can outperform the market in the long run