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Real Estate Principles, 11th
Edition
By Charles F. Floyd
and Marcus T. Allen
Chapter 13
Understanding Real Estate Market
Dynamics
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Owner-Occupied Residential Real
Estate Markets
• Basic supply/demand equilibrium model
– Supply – amount or quantity of the good or
service that will be offered at various prices
– Demand – amount or quantity of the good or
service that will be desired at various prices
– Equilibrium – the price/quantity combination
at which quantity demanded equals quantity
supplied
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Demonstrating Market Dynamics
• Figures:
– 13.1 Supply/Demand Equilibrium
– 13.2 Demand Changes Price
– 13.3 Supply Changes Price
– 13.4 Simultaneous Supply and Demand
Changes
• Example from Fort Lauderdale, Florida
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Price Movements in Real Estate Space
Markets
• The demand curve in real estate markets is
downward-sloping.
• The supply curve in most real estate markets is
vertical at the current quantity of space and
horizontal or rising at higher quantities.
• In a market with a horizontal supply curve,
therefore, demand increases will not result in
long-term price increases. Demand decreases,
however, may lead to dramatic price decreases.
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Commercial Real Estate Space Markets
• Transactions for the rights to use land and
buildings
– People, firms, and other entities are willing to
pay various prices for the use of space for
consumption or production purposes
(demand)
– Owners of space are willing to sell the rights to
use such space to the users for various prices
(supply)
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Office Space Markets
• Class A highest rent per square foot
• Class B very desirable but lack attributes
necessary to charge top dollar
• Class C physically acceptable but not many
amenities
• Class D few amenities and poor location
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Retail Space Markets
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Freestanding retail
Neighborhood center
Community center
Regional center
Superregional center
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Industrial Space Markets
• Warehouse
• Manufacturing/Production
• Materials processing
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Agricultural Space Markets
• Annual (seasonal) cropland
• Perennial cropland
• Livestock grazing
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Lodging Space Market
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•
•
•
•
Highway motels
Convention/business hotels
Luxury hotels
Resort (destination) hotels
Extended stay hotels/motels
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Residential Space Market
•
•
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•
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Single-family detached homes
Single-family attached homes
Manufactured homes
Multifamily apartments
See Close-Up “The Electronic Revolution’s
Impact on the Value of Location”
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Real Estate Asset Market
• Transactions involving cash-flow rights to real
estate
• See Figure 13.5 Major Types of Capital Asset
Markets and Investment Products
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The Larger Market
• The real estate asset market is part of a larger
market:
– Publicly traded equity assets (stocks, mutual
funds, real estate investment trusts)
– Privately traded equity assets (real property,
private companies, oil and gas partnerships)
– Publicly traded debt assets (bonds, mortgagebacked securities, money instruments)
– Privately traded debt assets (bank loans, whole
mortgages, venture debt)
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Price Determinants in the Real Estate
Assets Market
• Opportunity of cost capital
• Growth expectations
• Risk
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Tying Together Space & Assets Markets
• See Figure 13.6 The Real Estate System
• Prevailing economic conditions influence both
capital and space markets
• Landlords and tenants negotiate rents, which
produce cash flows to the real estate asset
market
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Tying Together Space & Assets
Markets, cont.
• Property owners/investors in the asset market
determine the present value of the cash flows
(that is, the value of the property).
• If property values are greater than or equal to
cost of production (which includes reasonable
profit for the developer), developers build
new space.
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Commercial Real Estate Market
Analysis
• Examination of the supply and demand sides
of a real estate space market and the balance
(equilibrium) between them
• Inputs to market analysis
– Vacancy rate – higher vacancy rate indicates
less demand relative to supply and vice versa
– Rent or price level – trends in rents and prices
indicate changes in the balance between
supply and demand
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Commercial Real Estate Market
Analysis, cont.
• Inputs to market analysis, cont.
– Quantity of new construction started – indicates
new supply that will be coming into the market
– Quantity of new construction completed –
indicates new supply that is just arriving into the
market
– Absorption of new space – indicates the rate at
which new supply is becoming occupied in the
market
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Using Market Analysis to Look Forward
• “Months Supply”
– Months supply = (vacant space + space in
construction)/net absorption per month
– If months supply is much greater than
construction time for new projects, then the new
project will likely hit the market at a time when
supply exceeds demand
– If months supply is equal to or less than
construction time for new projects, then a new
project will likely be well-received by the market.
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Professional Market Analysis Reports
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•
•
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Office
Lodging
Industrial
Apartments
Owner-occupied residential
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