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Chapter 2: In This Chapter Real Estate and the U.S. Economy Real Estate and U.S. Society Local and Regional Markets Characteristics of U.S. Homes Commercial Real Estate Page 14 Real Estate and the U.S. Economy Personal equity • Homeowner’s net worth: US $200,000 • Renter’s net worth: US $5,000 Jobs • Every 1,000 home sales adds 500 jobs Other contributions to economy • US $60,000 for every home purchase • Housing is 15% of GDP • Homeowners pay 80-90% of federal income taxes Commercial real estate: size, scope, and quality Page 14 U.S. Real Estate—Global Perceptions Source: 2011 AFIRE Annual Survey Page 15 Why U.S. Real Estate Is a Good Buy Access to affordable capital • Non-recourse loans for qualified borrowers Organized market and orderly processes Strong right to own and transfer property • Few restrictions for foreigners Possible currency discount Variety and choice Lower effective tax rate • • • • Page 16 Cost recovery Interest deduction Lower capital gains taxes 1031 exchanges Who Buys U.S. Real Estate? Investors Vacation homebuyers Immigrants US $66 billion • 7% of the market Page 16-18 Source: 2010 NATIONAL ASSOCIATION OF REALTORS® Profile of International Home Buying Activity Who Buys U.S. Real Estate? Cont’d Source: 2010 NATIONAL ASSOCIATION OF REALTORS® Profile of International Home Buying Activity Page 20 Impact of Immigration Population growth=increased demand • 6 of 7 states with highest foreign investment also some of the fastest growing states Home prices and rents rise with immigration Earnings of immigrants exceed the average over time Higher than average homeownership rates among immigrants Page 19-21 Real Estate and U.S. Society Homeownership interwoven with success and prosperity Expression of U.S. ideals and the “American Dream” Page 22 Post-War Homeownership Programs Servicemen’s Readjustment Act of 1944 and Housing Act of 1949 • Expanded affordable financing Mass production techniques by home developers • Rows of suburban homes Mass migration from the cities and to the Sunbelt Page 23-24 Source: U.S. Census Bureau Urban Decay Result of suburban migration Resources diverted from cities Businesses followed employees Deterioration of infrastructure and housing Decline of city retail centers Demolitions for renewal efforts and highway construction isolated neighborhoods Page 24 Urban Sprawl Common criticism of suburban design • Ecologically destructive • Dependency on automobiles • High per-person infrastructure costs • Lost productivity • Low aesthetic value • Ethnic and socioeconomic segregation • Declining health Page 24-25 Urban Renewal Shift to renovation and commercial development • “Gentrification” Increased amount, quality, and value of urban homes Renewal of Central Business Districts (CBDs) • Combination of office, residential, retail • Public-private partnerships • Historical, cultural, and entertainment features highlighted Page 25 Smart Growth Fights urban decay and urban sprawl Focuses on: • Existing assets of community • Long-term implications of development patterns • Fiscal impacts of these patterns Does not deny the need for housing Open space, walkability, and other aspects of healthy communities Part of green building movement Page 25-26 Homeownership Today Government promotes expanded homeownership NAR supports expansion of homeownership Most Americans aspire to own homes Page 26-27 American Views on Homeownership (% Agree or Strongly Agree) Source: “American Attitudes about Home Ownership,” NATIONAL ASSOCIATION OF REALTORS® Tools to Promote Homeownership Mortgage interest deduction (MID) Property tax deduction Government Sponsored Enterprises (GSEs) Page 27 Local and Regional Markets Markets vary in style and price Markets within markets Real estate professionals must know their markets: • • • • Demographics Employers Vacation or retirement areas Other institutions (e.g., academic) Page 28-29 U.S. Homes: Suburban Developments Varied pattern according to: • Topography of land • Infrastructure demands • Ordinances • Amenities of development Cul-de-sacs Page 29-30 U.S. Homes: Transit-Oriented Development Seeks to alleviate urban sprawl High-density, mixeduse development near public transit stops Livability and walkability Page 30-31 Source: Wikipedia; U.S Environmental Protection Agency U.S. Homes: Common Characteristics Construction • 2” x 4” (5.1 cm x 10.2 cm) or 2” x 6” (5.1 cm x 15.2 cm) stud framing • Plywood sheathing and various materials on exterior walls • Drywall on interior walls Lots • Yards • Landscaping Page 31-32 U.S. Homes: Common Characteristics Cont’d Square footage • Newly constructed homes 2,500 square feet (232.26 square meters) on average • Can be much larger Layout • Open vs. traditional layout Home styles Page 32-33 Commercial Real Estate Income-producing properties Absolute Gross Absolute Net Lease Lease Building class Tenant pays all Owner pays all operating expenses operating expenses Owners Hbyrid Lease Buyers Party responsible for specific Due diligence operating expenses negotiated between Property management owner and tenant Brokers Source: Adapted from CCIM Institute Tenant improvements and space planning Leases Page 34-40 Valuation of Commercial Real Estate Net operating income (NOI) Net present value (NPV) Capitalization (Cap) rate Cash-on-cash return Gross rent multiplier (GRM) Page 40 Types of Commercial Properties Primary • Office • Industrial (e.g., warehouses, manufacturing space) • Retail • Multifamily (income-producing) Page 41 Others • Hospitality • Land • Recreational • Marinas • Golf courses • Self-storage Commercial Services and Staff Brokerage Services • Acquisition and disposition • Corporate solutions • Leasing agency and landlord representation • Tenant and buyer representation • Investment services • Net lease transactions • Auction and accelerated marketing • Sales and leaseback • Market research and opinion of value • Site selection service Page 42-43 Asset Services • Asset management • Property management • Corporate facilities management • Build-to-suit and development services Financial Services • Capital markets • Acquisition and disposition • Investment services • Mortgage brokerage • Structured lease finance • 1031 tax deferred exchanges Commercial Services and Staff Cont’d Firms may specialize in one or several services • Employ expert staff in those areas Large firms employ specialized staff in research, appraisal, valuation analysis Some commercial practitioners focus on one client Residential practitioners do not usually provide commercial services • Errors and Omissions Insurance likely prohibits Page 42-43