Dire Dawa University Institute of Technology

School of Civil Engineering and Architecture

Construction Technology and Management Chair

Development and Construction

Economics (COTM 5272)

By: Tewodros G. (MSc.) 1

 Defining Demand
❑ In Economics, “Demand is defined as the
ability and willingness to buy some particular
goods or services at particular time”.
❑ Real Estate Demand – can be defined as the
quantity of a particular type of real estate product or
service that will be purchased or leased in a given
market.
 Defining Real Estate Demand
❑ Real Estate Demand is estimated on the basis of
the type of the real estate product or service.
1. Retail property – estimate is made of the demand
for retail service
2. Office space – estimate is made of the demand for
the services provided by businesses housed in
offices.
3. Housing – estimate is made of population,
employment, and households in the area.
4. Retail property – estimate is made of the demand
for retail service
Defining Real Estate Demand
4. Industrial space – is estimate for the industrial
products produced in the area along with along
with the industry’s corresponding demand for
employees.
5. Recreational space – demand is estimated for
the recreational use to attract local residents and
vacationers.
 Demand Segmentation
❑ Property productivity analysis and market segment
analysis both identify attributes including:
▪ Physical attributes
▪ Legal attributes
▪ Vocational attributes
▪ Design/ amenity attributes
❑ Real estate market segmentation is dividing
market demand into meaningful user groups based
on property attributes. i.e., identifying different user
groups attracted to the physical, locational, legal and
design/ amenity attributes of the real estate.
 Demand Segmentation
❑ The productivity and market segment analyst
seeks answers for questions including the following
at particular place and time:
1. What demand is there for the attributes of the
property? Who can use these attributes?
2. How will the productivity attributes of this
property attract users in the real estate?
3. How many people can afford for the attributes of
these particular properties?
4. How much are the people willing to pay for
these attributes?
 Demand Segmentation
❑ Real Estate Demand is estimated on the basis of
the type of the real estate product or service.
1. Retail property – estimate is made of the demand
for retail service
2. Office space – estimate is made of the demand for
the services provided by businesses housed in
offices.
3. Housing – estimate is made of population,
employment, and households in the area.
4. Retail property – estimate is made of the demand
for retail service
 Table Productivity Analysis of particular
attributes of subject and competition
Item Subject Competitive properties
1 2 3
Physical Attribute
Size (sq.m)
Quality
Age
Condition
Conclusion
Locational Attribute
Accessibility
Market area density
Market area income
Direction of urban growth
Conclusion
 Table Productivity Analysis of particular
attributes of subject and competition
Item Subject Competitive properties
1 2 3
Legal Attribute
Zoning
Conclusion
Design Attribute
Design
Amenities
Conclusion
 Demand Segmentation
❑ Variable used in Market segmentation
▪ Socioeconomic variables – age, sex, family size,
income, occupation, education, stage in family,
▪ Geographic variables – nation, state, region,
country, etc
▪ Buyer/ user property – end user, investor, price
conscious economizer, convenience or quality
seeker, etc,
Techniques for Examining Demand
▪ Estimate – refers to the current population,
employment, and demand
▪ Forecast– refers to the future population,
employment, and demand.
▪ Forecast – is the projection or set of projections,
deemed most likely to occur.
Sources of demand
▪ Increase in population
▪ Increase in employment
▪ Redevelopment growth
▪ Relocation growth
▪ Speculative/theoretical demand – generated by
speculative investors who buy lots,
condominiums or other properties in down
markets and expect to resell them for a profit to
other users or investors.
 Types of Demand

❑ The two relations

1. The ratio of the retail space in the market area or city
to the population of the market area or city.
rm = Rm /pm rc = Rc /pc

2. The ratio of the retail space in the market area or city

in the number of households in the market area or city.
rm = Rm /Hm rc = Rc /Hc
Where,
Rm and Rc = Number of sq. meter of retail space in the market are and the city,
respectively
pm and Pc = Population of the market are and the city, respectively
Hm and Hc = Number of households in the market are and city, respectively
 Types of Demand

❑ The other two ratios

1. Sales per capita
Sm /pm = Sales per capita in the market area
SC /pC = Sales per capita in the city/ or sales
per household in the market area or city,
2. Sales per household
Sm /pm = Sales per household in the market
area
SC /pC = Sales per household in the city
Types of Demand

Example:
Market Area Ratio (MAR)
Occupied space in the market area = 500,000 sq.m
Market area population = 12,500 people
MAR = 40 sq.m of occupied retail space per person
City Ratio (CR)
Occupied space in the city = 800,000 sq.m
city occupation = 40,000 people
CR = 20 sq.m of occupied retail space per person
 Types of Demand

Basic retail demand

❑ Retail Demand is a function of
▪ House hold buying power and
▪ The share of income spent on retail goods
❑ Hence, the amount of money spent on retail goods
converted to an estimate of retail space.
❑ The retail space is then estimated using a
conversion factor that reflects how much sales
volume is required for a typical store to do
business in a market
 Types of Demand

❑ The general formula for retail space is thus

estimated using the equation

cH = Change in the number of households in market area per

year
AHi = Average household income per year
CRi = Capture rate of house hold income by retail facilities
SR = Sales required per square feet to attract a retail facility to
this market
Types of Demand

Example 1:
Given
cH = 500 house hold change over next five years
AHi = Average household income is ETB 75,000
CRi = 25% of income spent on retail
SR = ETB 450
Denand for retail space
= (500 x 75,000x0.25)/450 = 2083.33 sq.m of new retail
space is required in the coming five years or
416.67 sq.m per year in average
 Types of Demand

❑ Is generated by the services provided by

businesses housed in offices
▪ That is, demand of businesses for employees who
use office space
❑ Assume that ration between general population
and the number of population employeed in offices
remains constant.
❑ Hence, the following relationships can be used to
analyse office space demand
Types of Demand

Relationships to analyze office space demand

OSm /Pm = (OSm /P)m
OSc /Pc = (OS /P)c
OSm /OEm = (OSm /OE)m, and
OSC /OEc = (OS /OE)c
Where,
▪ OSm and OSc = Sq. meter of office space in the market are and the
city, respectively
▪ Pm and Pc = Population of the market are and the city, respectively
▪ Pm = (OSm /P)m
▪ OSc /PC = (OS /P)C
▪ OEm and OEc = Office employees in the market are and the city,
respectively
▪ (OSm /OE)m, and (OS /OE)c = Office space per employee in the
market are and the city, respectively
 Types of Demand

General Formula to determine the demand for

Office Space in sub market area:

Office Demand = COE x SF, OS/E x CRm

(in submarket area)
Where,
COE = Change in the number of employees over a given
period
SF, OS/E = the number of sq. meter office space per employee
CRm = capture rate for the submarket
Types of Demand
Example: Assume that the number of employees in a
submarket area and the number of employees housed in
office is as shown below. Consider also each office
employee uses 10.5 sq. meter space and the expected
capture rate is 15% of the total office market. Determine
the office space demand in the submarket:
i) for each year
ii) for five year and Each year
iii) average in the five years
2012
(Current
Year Yr) 2013 2014 2015 2016 2017
Number of
Employees 150,000 165,000 180,000 200,000 225,000 255,000
Employees
housed in
Office 65% 65% 65% 65% 65% 65%
Types of Demand
i. Annual office space demand

Year 1 2 3= 4 5 6 = 3x4x5
0.65x2
No. of office Change in Employees Office Capture Office Space
Employee No. of housed in space per Rate Demand
office office employee
Employee (sq. meter)
Current 150,000 -
2013 165,000 15,000 9,750 10.50 0.15 15,356.25
2014 180,000 15,000 9,750 10.50 0.15 15,356.25
2015 200,000 20,000 13,000 10.50 0.15 20,475.00
2017 225,000 25,000 16,250 10.50 0.15 25,593.75
2027 255,000 30,000 19,500 10.50 0.15 30,712.50
 Types of Demand
ii. Total office demand in five years

iii. Average office space demand:

 Types of Demand

❑ Housing demand is estimated on the basis of

▪ Population
▪ Employment
▪ Number of households
 Types of Demand

General Equation to estimate housing demand

Demand of new housing
= (cH + nR) – (Va - Vn) – (UCa – UCn)
Where,
cH = change in the number of households in a
market area over a given period
nR = net removable units (demolitions)
Va = Actual Vacancy
Vn = Frictional Vacancy
Uca = Actual Housing Units under construction
UCn = The normal (average)