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    Chapter 2

    Uploaded by

    Linh Phạm

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    © All Rights Reserved
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    of 13
    CHAPTER THE OPERATION 2 | of PROPERTY MARKETS: A MIcRO AND Macro APPROACH is i ket value of a specific house? How much rent can a property manager See ae ia ae space? Is i best time to develop a site? What should the den. sity and use be? Real estate decisions such as these must be based onan understanding of the economic environment of each parcel or property. This economic environment is con- stantly being changed by forces and events at two levels: the micro level and the macro level. Micro forces are those location-specific factors that influence the value or use of one particular site. Macro forces, on the other hand, are those broad economic factors that affect market timing and influence the profitability or use of all properties. As a discipline, the study of economics is divided into two broad fields with a simi- lar distinction: microeconomics and macroeconomics. Microeconomics refers to the study of how individual economic agents (such as households and firms) operate, whereas macroeconomics investigates the behavior of the overall economy. Real estate economics iene, 2 zs a way. In this book, the study of the use, development, or pricing of invblves ty ain no the Overall market aggregating across individual properties In real estate ebb ieccg Eman chi en micro and Macro approaches, B aoe uss ecructalirolerit Sieur guise ae ditional urban €conomics itetanan tag Sat oe roa heally om seat With the explicit recognition rae treating the operation of land and property mat ; Site? What is that site’s hi ed ae er Zocation. What is the demand for Jand ae ghest and best use? How do house prices vary across sites: chapter2 The Operation of Property Markets 23 why? What factors determine of ite microeconomics investi Tce rents oF the location of firms and their plants? Real fond markets and developing or these questions by studying the operation of urban Realestate macroeconomics abou ston forthe spatial structure of cities. verall market for housing, land, oy vot" ffm the spatial dimension and considers the o ion can be justified on °° SPACE. The simplification that results from such ee oe the WO Bounds. First, as with any type of inquiry, insight often A - eierte mae oe ©xpense of some realism, by abstracting or making sim- Pe the detailed time serie locations and dealing with a market as Ts 10 and 12 of this book simply could properties within a market is similar, then the macro approach will work. If properties react very differently to macro effects, then such modeling will be largely unsuccessful. DEFINING MARKETS: PROPERTY TYPES, In addition to the distinction between microeconomic and macroeconomic approaches to real estate, throughout this book we distinguish between residential and nonresidential property markets. This delineation has both advantages and disadvantages, but we believe there are net benefits to the distinction. At the macroecon clearly behave differently from those of nonresidential property. Movements in housing prices and residential construction do not relate closely to movements in rents or con- struction for office, industrial, or retail properties. The institutions that guide each of these markets also are quite different. Residential contractors rarely build commercial space. Industrial or office space brokerage firms have no connection to firms undertaking tesidential brokerage. The financing of residential Properties also takes place through a distinct mortgage origination process, and the residential mortgage market has a very active secondary market (the market in which mortgages are purchased and sold). Com- mercial financing takes place largely through private placements, but there is only a small formal secondary market. Thus, at the macro level, there are good reasons to consider dif- nt property types as different markets, At the iagieal the distinction between residential and nonresidential property is Tot as clear, largely due to the fact that both types of property use and compete for a com- Mon resource: land. The price of commercial property, for example, bears a direct rela- tionship to the price of residential property, since both uses compete for the same fixed Supply of land. The locations of commercial and residential property also are closely Sr ‘omic level, housing markets 24 Introduction to Real Estate Markets See tion 1 linked through the commuting of workers and travel of shoppers. At the same behavior of participants in the residential and nonresidential property markets 1 ty different economic theories and motives. Finally, the extensive government regula’ land in the two uses (e.g., through zoning) has important impacts on both, Fesidentge® 7 ang nonresidential property markets. DEFINING MARKETS: AREAS The second issue in defining a property market involves the question of spatial aggre tion: what is the appropriate geographic definition of a real estate market? Shoulg .°* kets be defined at the neighborhood, town, metropolitan, state, or national level? There no definitive answer to this question, but there are both conceptual and pragmatic crite, ia for making the choice. Conceptually, the geographic definition of a real estate market should encompas, real estate parcels that are influenced by the same economic conditions. Clearly, ational economic conditions, such as interest rate levels, influence real estate markets, But we also know that real estate markets are profoundly influenced by economic Conditions such as employment and income, which vary widely across regions of the country, How should these regional or local economies be defined? Urban economists have long strug. gled with this question. As a practical matter, the tled by the way in which data o geographic definition of a local economy is generally set. in urban economies are collected. The U.S. Census Bureay defines metropolitan statistical areas (MSAs) on the basis of economic behavior rather than the legal, political, or historic precedent that delineates towns or states, An MSAis generally defined as a county with a central city with a population of 50,000 or more and adjacent counties that are metropolitan in nature. The decision to include a county in an MSA is based on population density, the percentage of the population that is urban, the nonagricultural employment level, and the commuting patterns among counties and with the central city. As a result, MSAs are drawn to reflect a single labor market and the mobility of workers; in addition, MSA boundaries often change over time.' Commuting within a metropolitan area should not be so burdensome that it prevents most households from living and working at any two locations. In other words, a worker at a particular location within a metropolitan area should not be severely constrained from taking any job within that area. Conversely, commuting between metropolitan areas should present enough potential obstacles to make it a rare occurrence. This labor-mobility definition of a local economy has broad ramifications for how real estate markets operate. If a worker within a metropolitan area can be reasonably expected to live anywhere in that area, then all houses in that area are, in some sense, "In recent years, the Census Bureau has regrouped some adjoining and economically linked MSAS into common Consolidated Metropolitan Statistical Areas (CMSAs). chapter 2 The Operation of Property Markets. . pattve ener Gas For example, by commuting more or less, any worker could, Ieee cold ees Locations for firma are sreery competitive, in the sense that @ eed choose any site and, in Principle, still find workers willing to com- Fae oer echolds en wPOlitan areas, this degree of competitiveness normally does not exist. Households in San Francisco cannot reasonably be expected to work in Los Angeles, which means that the real estate markets of the (wo areas ae in some fundamen- tal sense disconnected. The competitiveness of Properties within a metropolitan area ‘ air the eee — to change houses without switching jobs, and change jobs Tesi ii . ee areas separates ther real en ga Oye absence of such mobility between met Conceptually, if we define our unit of analysis at the macro level as the metropoli- tan area, wh is the appropriate unit of analysis for the mi ? Within a market definition, there are distinct factors that affect the Pohang en ae 7 Affect the behavior of individual properties that are different from those factors that affect the overall market. This effectively means that there is something to be gained from the whole micro-macro delineation; that micro analysis is different from macro analysis, and that the two complement each other. If there were little difference between the types of theories and arguments used at the micro and macro levels, then there would not be any clear advantage to the twofold approach. In real estate economics, the role of location helps to create the distinction between the two levels, particularly when markets are defined at the metropolitan level. The mobility of households and firms across locations within metropolitan areas is fundamental to the microeconomic study of real estate. Since locations within a market differ (by commuting for example), mobile households will quickly generate higher prices for more desirable (lower commuting) sites. The theory of urban land markets pro- vides a methodological approach based on this high degree of spatial mobility. The mobility of firms and workers within metropolitan areas also means that an economic shock occurring at one site (c.g., loss or gain of jobs) will have impacts on prices at all sites, as mobile workers adjust their demands. Thus, sites within metropolitan areas should react similarly to changes affecting the overall market. Throughout this book, our macro analysis is generally focused at the metropolitan level, although occasionally we deal with a national housing or commercial real estate market—particularly when there appears to be systematic patterns of behavior across many metropolitan areas. For the micro level analysis, we generally look within a metro- Politan area, often at cities and towns within an MSA. REAL ESTATE MICROECONOMICS: URBAN LAND AND LOCATION When defined at the metropolitan level, real estate property markets contain thousands, and even millions, of individual parcels (sites, houses, buildings). Each property occu- Pies a location that is technically unique: adjacent sites may have similar, but not exactly identical, locations. A market in which each good is somewhat unique is referred to as a Product-differentiated market. In addition to urban land, labor is another major market 26 Eee ere Page es tion that is fully product-differentiated. This type of market may be contrasted With 4 modity market, such as that for corn, in which goods are largely identical, ce The observed behavior of individual parcels within the urban land Market tg follow several patterns that are quite characteristic of product-differentiated market 1 1. The prices of individual properties or land parcels vary widely and gy, cally with the physical or location characteristics of the property, The vat that households or firms place on these characteristics determines the p

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