課程二 : 不動產經濟 Real Estate

Economics
課程重點
•不動產市場上的需求與供給如何決定價格
•均衡價格如何受到 market imperfection 的影
響
•不動產需求的估算
– Location quotient
– Basic non-basic method
 Real Estate Markets: Understanding Real
Estate Supply and Demand
• The markets for real estate consist of all space, housing units, etc
available for sale or lease. The market has many segments
• The interaction of supply and demand are key themes throughout
the real estate investment analysis.
• The interaction of supply and demand sets market prices and rents
• Supply for real estate:
• total square feet of all buildings offered for sale or rent give price or rental
rate
• Demand for real estate:
• the amount of square feet of space, housing units which buyers wish to
rent or purchase are given rent rate or price
• demand for real estate is derived demand
 Market Equilibrium and Vacancy Rates
• The following graph illustrates the relationship between market
equilibrium and vacancy rates.
• Vacancy rates increases if space is available at prices that exceed
market equilibrium, and vice versa
• This simple economic framework considers that balance between
the price the market will pay and the price the investor must charge.
• These estimates are the used to construct future cash flow estimates
associated with particular development plan.
 Commercial real estate rental market
equilibrium

Rent/unit S = f(P)
AB = excess demand
excess demand drives up prices
Ph C D
Vacancy rate increases
CD = Excess supply
Pe Normal vacancy excess supply causes prices to be
rate bid down
Vacancy rate decreases Pe = equilibrium price
Pl
A B
Qe = equilibrium quantity
D = f(p)
Qa Qe Qb
Quantity of space (sq.ft.
)
Short and long run equilibrium
adjustments

Rent/unit Existing supply (fixed)

New long run supply curve

P1
P*
P0 New demand curve

Old demand curve

Qo Q*
Quantity of space
 Real Estate Market Imperfections
• The real estate is not a perfect market. The market is influenced by several
distorting factors that affect market equilibrium
• Price negotiation
• asymmetric information between sellers and buyers about property and local
market
• high payoffs for superior knowledge
• Differences in bargaining power between seller and buyer
• The pricing decision
– The pricing decision determines amount of revenue, vacancy and absorption
– Higher prices increase revenue but they also increase vacancy
• Absorption Rate: change in occupied space divided by beginning
occupied square footage for the year, i.e.. growth rate in demand
 Real Estate Market Imperfections
• Thin market
• Limited number of buyers and sellers, especially for single purpose
properties
• Heterogeneity asset: benchmark problem
• each property is unique in terms location, design, size etc
• Financing and investment decisions are linked:
• Most properties are affected by terms of financing
• Capital intensive
• limits access to market.
• Localized and highly segmented markets
• High transaction cost
• Tax treatment of real estate
 Real Estate Feasibility and Market
Analysis
• Focus of market analysis:
– Real estate market analysis is primarily concerned with the
feasibility or infeasibility of future course of action
– it takes past and present information to project what is like
ly to happen at some specified time in future
• Demand for real estate is derived demand
• Need to examine the employment and income generating acti
vities of market area
• Surrounding economic activity is the single most important de
terminant of land use hence land value
• Economic activity Land use Land value
The Need for Market Analysis
• To assess demand for a new project
• Assess the feasibility of change in use
• Basis for purchase or sale decision
• Competitive position of proposed project
• Optimal location or siting of proposed project
• Feasibility of rehabilitation
• Move to a new location
• To change zoning or zoning variance
Framework for Market Analysis
• Market area delineation
• Economic base analysis
• Estimation of potential demand
• Site evaluation and selection
• Projections and conclusions
 Delineation of Market Area

General
Market Area

Market
Subarea

Trade or
Service Area

Specific
Location/Site
 PURPOSE
Site in Search Use in Search Capital in Search
of Use(s) of Site(s) of Investment(s)

Market Analysis (for each alternative)

Identify Estimate Measure Determine
Alternatives Demand Supply Gap

Location Analysis
Characteristics Linkages Land Use Patterns

Financial Analysis
Estimate Calculate Analyze
Income Investment Value Yield Feasibility

THE MARKET-BASED Decision Analysis

Compare Alternatives
DECISION PROCESS Estimate Risk
Conclusions
(THE SIFTING AND WINNOWING Recommendations
PROCESS)
 What Creates Demand for Real Estate
• Most real estate economists consider employment, not number
of people, as the deriving force behind real estate demand
--effective demand, not potential demand.
• Employment does the following:
– Create demand for people to work in employers’ firms
– Create the purchasing power to support demand
– Create the need for space to house economic activity
– Create demand for further employment to support businesses
 A Model of Demand for Real Estate
• The following model suggests that there is a linkage between basic
employment, general employment , population, and ultimately
demand for various types of real estate
• The theory holds that increase in demand for products and services
of the basic sector cause the basic industries to employ more
people.
• When this happens the non-basic sector must expand to meet the
demand of the expanded labor force in the basic industries
• The resulting increases in the number of employed persons, general
population, and local purchasing power lead to increase in demand
for all types of real estate
 A MODEL OF DEMAND FOR REAL ESTATE

Basic
Employment

Office Total Employment Industrial

Demand (Basic and Non-Basic) Demand

Population/Income

Housing Retail
Demand Demand
 Economic Base Analysis
• Economic Base: economic activities that enable a city, town,
region to attract income from outside
• Basic employment brings money into a market area as opposed to
employment that merely circulates money already in the market
-- export oriented industries
• The latter type of employment is called non-basic employment
--services and support industries
• Task: Analyze how changes in economic base activities affect
future employment, population, future income and thus demand
for real estate.
Why Study Basic Industry?
• The focus of economic base activities is employment
and income generating activities
• Jobs + People + Income ---> land use or demand for
real estate
• Steps:
• Predict future employment in basic
• predict future total employment
• Convert population into # of households
• Predict total household income
• Estimate potential demand
Methods of Economic Base Analysis
• Location quotient
• Basic non-basic
• Common characteristics of models
• urban economy is open
• stress relationship with outside world
• differ in terms of capturing complex realities of
urban areas
 Location Quotient
• A statistical model used to identify basic industry
• Assumptions of model
• No spatial variation in consumption patterns
• No spatial variation in labor productivity
• An industry produces a homogenous good
• LQi = (LEi /LEt)/(NEi /NEt)
• where
– LQi = location quotient for industry i
– LEi = local employment for industry i
– LEt = total local employment
– NEi = national employment for industry i
– NEt = total national employment
 Location Quotient Analysis
• Rules for interpreting LQ
• LQ < 1 ---- non-basic
• LQ = 1 --- non-basic
• LQ > 1 ---- basic or export oriented
• If LQ > 1, determine the number of employees w
ho produce for export as follows
• Xi = (LEi/LEt - NEi/NEt)xLEt
• where Xi = portion of total employment in basic industry i t
hat produces for export
 Location Quotient Analysis
• Consider the following two industries in a market area, Industry X, Industry Y
Local employment in Industry X = 3,000
Local employment in Industry Y = 5,000
Total employment in market area = 10,000
Total population in market area = 40,000
Total income = $220,000,000

National employment in Industry X = 7,000

National employment in Industry Y = 13,000
Total employment in U.S.. = 100,000
 Location Quotient Application
• The LQ for Industry X:
LQx = (3,000/10,000)/(7,000/100,000) = 4.28
• LQ for Industry Y:
LQy = (5,000/10,000)/(13,000/100,00) = 3.85
Actual basic employment in Industry X = (.30 -.07)(10,000) =2300
Actual basic employment in Industry Y = (.50 -.13)(10,000) =3700
Total actual basic = 2300+3700 = 6000, Total non-basic = 10,000-6000 = 4000
 Basic non-basic method
• Used to predict the impact of any proposed change in basic emplo
yment on community’s,
• total employment
• total income
• total population
• Assumptions of model
– Total emp (Et) = Basic emp. (Eb) + Non-basic (Es)
– Change in basic sector leads to change in non-basic
– Ratio of total employment to basic employment can be measured
– This ratio is sufficiently stable to be used in forecasting
Basic Non-basic Multipliers
• Employment Multiplier (Ke)
– Ke = Et/Eb
– Alternative method small k = Es/Et thus the empl
oyment multiplier is 1/(1-k)
• Population Multiplier (Kp)
– Kp = P/Et , where P = total population
• Income Multiplier
– Ky = Y/Et, where Y = total income
 Application: Forecasting
• Forecasting future total employment
– Employment multiplier Ke = 10,000/6000 = 1.67
– Using alternative method k = 4000/10000 = .4
– multiplier = 1/(1-.4) = 1.67 CHECK
• Basic employment expected to increase by 3000 jobs to
E*b = 9000 by year 2000.
• What is the impact on total emp.?
• E*t = (Ke)(E*b) = (1.67)(9000) = 15000
• Similarly we can predict impact on total population and total inc
ome by year 2000
 Application: Forecasting
• Forecasting total Population
– Population Multiplier Kp = 20,000/10000 = 2
– Future population, P* =( Kp)(E*t) = (2)(15000) = 30000
– Increase in population 30000-20,000 = 10000

• Forecasting total income

– Income multiplier Ky =$ 220,000,000/10,000 =$20,000
– Future income Y* = (20,000)(15000) = $300,000,000
– Increase in income = 300,000,000 - 220,000,000 =80,000,000
 Demand Analysis
• Project Demand for Housing
– Change in population = change in employment/labor force part
icipation rate
– OR, Total pop. = (Kp)(E*t)
– Change in #households = change in pop./household size
– Change in homeowners = (ownership rate )(change in # of hou
seholds)
– Renters = #of households - change in # of homeowners
• Note: the type of housing desired will depend on income,
taste, family size, age, life style preferences, etc
 Demand Analysis (continued)
• Estimating demand for office space
• Change in office emp. = (% of office workers)(change in total emp.
• Demand for additional office space = (change in office emp.)(office s
pace per employee)

• Demand for retail space: Trade area analysis

• Social and economic groupings
• Neighborhood Boundaries
• Travel and shopping patterns
– Total Purchasing power = (# of households)(average household income)
– Total potential sales = (% of income spent on groceries)(total purchasi
ng power)
 Demand Analysis for Retail
• Total Purchasing power (TPP)
– TPP = (# of households)(average household income)
• Total Potential Sales (TPS)
– TPS = (% of income spent on groceries)(total purchasing pow
er)
• Total Site Sale (TSS)
– TSS = (Site capture rate)(TPS)
• Justifiable Space Demand (JSD)
– JSD = (TSS)(Sales per sq.ft.)
 Real Estate Market Analysis: An
Illustration
• In 1994 Milwaukee county in the state of Wisconsin had total population of
1.5 million. The service sector is important in the economy of the county
and employed about 165,466 workers, about 35.2% of the total county
workforce of 470,114. Sausage industry employs about 2,924 while finance
insurance and real estate employed about 45,470 workers. Over the next six
years 1994 - 2000, employment at the county level in the three sectors is
expected to increase by 10,693 workers. The average household income for
the county is $45,000 and the average household size is 2.5 persons per
household. Households typically spend about 8% of their income on retail
items and average retail sales per square foot in the county is $300.
Employment in service sector in the state of Wisconsin is 536,208 and total
state employment is 1,948,856. At the state level the sausage industry
employs about 6,448 workers and finance insurance and real estate employs
129,017 workers.
 What are the questions to be answered?
• Given the information in the case we wish to analyze
how the predicted increase of 10,693 workers from
1994 to 2000 in the service, sausage and finance, etc
industries, affect (1) future total employment, (2) future
population and (3) future income. Ultimately, we also
want to know how these changes affect demand for
grocery space.
 Location Quotient Analysis
• Location quotient analysis
Service sector:
LQv = 165,466/470,114)/(536,208/1,948856) = 1.279

• Sausage industry:
LQs = (2,924/470,114)/(6,448/1,948,856) = 1.880

• Finance, insurance and real estate:

LQf = (45,470/470,114)/(129,017/1,948,856) = 1.461

• Note: all three industries are basic.

 How many workers actually produce for
export
• Actual basic employment in each industry
• Service:
Xv = (.35197 - .27514)(470,114) = 36,118
• Sausage:
Xs = (.00622 - .00331)(470,114) = 1,368
• Finance, insurance, real estate
Xf = (.09672 - .06620)(470,114) = 14,348
• Actual basic (all 3 sectors) = 51,834 (Eb)
Non-basic = 418,280 (Es)
Total employment = 470,114 (Et)
 Basic Non-basic Multipliers
• Employment Multiplier( Ke )
= 470,114/51,834 = 9.0696

• Population Multiplier (Kp)

= 1,500,000/470,114 = 3.1907

• Income multiplier (Ky)

= $27,000,000,000/470,114 = 57,432
 What is the impact of change in basic
employment of 10,693
• Future total employment (E*t) , in year 2000
E*t = (9.0696)(62,527) = 567,095
Total increase = 567,095 - 470,114 = 96,981
• Future total population (P*)
P* = (3.1907)(567,095) = 1,809,430, by year 2000
Change in pop. 1,809,430 - 1,500,000 = 309,430
• Future total income (Y*) , by year 2000
Y* = (57,432)(567,095) = $32,545,800,000
Change in income = $5,545,800,000
Number of households and average
household income
• Number of households = 1,809,430/2.5 = 723,772
, by 1999
• Average household income = $32,545,800,000/72
3,772 = $44,966, by yr. 2000

• Note: Despite the increase in total employment av

erage household income is predicted to be about th
e same as the 1994 level.
 Estimating potential demand for retail space
• Total Purchasing Power(TPP) = number of Households x
average household income = $32,545,000,000
• Total Potential Sales (TPS)= percent spent on groceries x TPP
= (.08)(32,545,000,000 = $2,603,600,000

• Potential Sales at Site (PSS) = site capture rate x TPS =(.5)

(2,603,600,000 = $1,301,800,000
 What is the net increase in space over the
6-year period?
• Change in income or purchasing power = $32,545,000,000
(1999) - 27,000,000,000 (1994) = $5,545,800,000
• Change in total potential sales (CTPS) = (.08)
(5,545,800,000) = $443,664,000
• Change in Potential Sales at Site (CPSS) = Site capture
rate x CTPS = (.5)(443,664,000) = $221,832,000
• This 50% capture rate assumes that neighboring counties
have equal chance of capturing the increase in retail
demand as Milwaukee county.
 Estimating Potential Demand for retail
space
• Remember sales per square foot = $300
• Justifiable additional demand for space = 221,832,000/30
0 = 739,440 sq.ft. new space
• Thus over the six year period Milwaukee county will need
an additional 739,440 sq.ft.

• Existing space = 4,339,333 - 739,440 = 3,599,893 sq.ft.

• New space = 739,440 sq.ft.
• Total sq.ft. = 4,339,333 sq.ft.
 Demand for Housing
• Increase in population= 309,430
• Increase in households = 123,772
• New homeowners = homeownership rate)(change in
households) = (.647)(123,772) = 80,080

• New renters = 123, 772 - 80,080 = 43,692

• Note: The homeownership rate of 64.7% is a national average.

 Criticisms of the Models
• Location Quotient
• Uniform consumption pattern is not strictly valid;
• Uniform productivity is not valid either; and
• Interpretation of LQ in some cases does not make sense.
• Basic non-basic
• Excessive aggregation
• Multiplier is an average response
• Instability of multiplier in short run (lag effect), in long
run (changes in pop., tech., taste)