Four Quadrant Model

Question 1

Space market

Answer 1

Physical stock on x axis
Rent on y axis
Downward sloping

• Tenants are market participants
• considerations: lease length, local amenities, relocation costs, transportation

Question 2

Asset market (market participants and considerations)

Answer 2

• Investors are market participants
• Considerations: expected future rental income, expectation of appreciation, transaction cost, maintenance/renovation cost, interest rate (leverage)

Question 3

Development market (market participants and considerations)

Answer 3

• relationship between price and annual amount of construction activity
• Developers are market participants
• Considerations: construction time, prospect of market demand and supply, construction material costs, project finance cost

Question 4

Asset market line and what it reflects

Answer 4

• Line represents cap rate (the higher the yield, the steeper the line)
• cap rate reflects the growth potential and riskiness of the underlying asset

Question 5

Development market line (what happens close to vertical/horizontal?)

Answer 5

• Line represents the replacement cost of real estate
• close to vertical: construction can be supplied at any level with almost the same costs
• close to horizontal: inelastic supply due to constraints (E.g. construction bottlenecks, scarce land)

Question 6

Demand shifts to right

Answer 6

Increase in rent level
Increase in asset price
Increase in new constructions
Increase in overall stock of space

Question 7

Decrease in cap rate (flattens)

Answer 7

Increases in asset price
Increase in new construction
Increase in stock of space
Decrease in rent

Question 8

Increase in construction cost

Answer 8

Decrease in level of construction
Decrease in stock of space
Increase in rent
Increase in asset price