Mid-Term Review Flashcards
Bid Rent Function
The maximum rent that a potential user would pay for a site or location due to transportation costs. The steeper the slope, the more sensitive to transportation costs.
Residual Land Theory
Land Value = Value of Goods/Services Produced - Cost of Production (including capital)
Net Present Value
Tells how much net value the investment is expected to create. Given in $
Kinked Supply Curve
Occurs when the price equals the marginal cost of adding new space (replacement costs) to the submarket
Space Market Segmentation
RE market tends to be local in nature and specialized by property usage
Equilibrium
When the quantity of space demanded equals the quantity supplied. AKA market rent
Asset Market
The exchange of ownership of real property. AKA property market
Space Market
The usage of real property. AKA rental market
Boom Cycle
Space markets see an extended rise in occupancy and rents
Compound Interest
Interest paid on the original principal and on accumulated interest
Compound Interest Equation
FV = PV + (1+i)^n
Negative Net Absorption
More commercial space was vacated than leased/absorbed. Rents in the scenario would fall
Positive Net Absorption
More commercial space was leased/absorbed than what was vacated. Leads to a decrease in supply causing rents to rise.
Net Absorption
The net change in the amount of occupied space in the market
Gross Absorption
Measures the total amount of space leased during the year
Months Supply (MS)
An indicator of how long it will take in months for all of the vacant space in the market to be absorbed
Months Supply Formula
MS = (Vacancy + Construction)/(Net absorption/12)
Centrifugal Forces
Decentralizing forces that limit growth and result in smaller more dispersed cities
If density and transportation costs remain constant, what is the effect of population growth on a city?
The city must expand
Highest & Best Use
The use that would produce the highest value for a property
HBU Tests (4)
- Is the use physically possible?
- Is the use legally permitted?
- Is the use financially feasible?
- Is the use maximally productive?
Central Place Theory Principles (2)
- If a territory is underserved, there is room for a new central site
- If a central site is already effectively located, it will be difficult to develop a new such site nearby
Edge City
A concentration of business, shopping and entertainment outside of a traditional downtown in what had previously been a residential or rural area
Economic Base Theory
The source of an area’s income. Growth depends on growth in the export sector.
Employment Multiplier
Net total employment increase/Export employment increase (typically 2.0 to 4.0)
Population Multiplier
Net total population increase/Export employment increase (typically 2.5 to 9.0)
Hurdle Rate
Rate of return required
Primary Centripetal Forces (3)
- Economies of scale
- Economies of agglomeration
- Positive locational externalities
SE Quadrant
Stock adjustment quadrant. How the new construction relates to the existing stock of space
SW Quadrant
Construction quadrant. How the amount of new construction is determined.
NE Quadrant
Rent determination quadrant. How rents are determined.
NW Quadrant
Valuation quadrant. How properties are valued in the asset market
Four Quadrant Model
The market is dynamic and always trying to move towards equilibrium but often overshoots or undershoots supply and demand
Cap Rate Perceived Risk
How risky is this investment relative to others? Greater risk = higher cap rate required
Cap Rate Growth Expectations
Future cash flow projections. Higher growth expectations = lower cap rate
Cap Rate Opportunity Cost of Capital
Considers how much investors could earn on other types of investment assets. Higher OCC = higher cap rate
Cash-on-Cash Returns
Annual before-tax cash flow/Total equity invested
Holding Period Return Formula
Income + (Ending value - Beginning value)/Beginning value
Mortgage Equivalent Yield
12 payments
Bond Equivalent Yield
2 payments
Sector Model of Urban Land Use (Hoyt)
Growth tends to extend outward from the city center along transportation lines and specific types of development tend to cluster together in patterns.
Effect of Negative Externalities
The boundary may have a depressing effect on adjacent location rent
Neighborhood Succession Theory
Location rents and values tend to stay nearly constant once urban development has occurred until changes in the highest and best use cause sudden or sharp changes in rents and values
Holding Period Returns (HPR)
Return for a single period. Assumes all cash flows occur only at the beginning and end of the period of time. AKA periodic returns
Equity Multiple
The number of times an equity investor has received their original investment back
Equity Multiple Formula
Total distributed returns/Equity paid-in
Concentric Ring Model (Burgess)
Growth starts with a CBD at the heart of the city and RE prices lower as you move away from CBD
Cap Rate Formula
Annual Net Income/Price
Annual Net Income Formula
Cap Rate x Property Price
Property Price Formula
Annual Net Income/Cap Rate
Central Place Theory Concepts (2)
- Threshold: the minimum population needed to make a service viable at a particular place
- Range: the maximum distance a consumer is willing to travel
Economies of Agglomeration
Productivity advantages of physical clustering (think Amazon)
Present Value Formula
FV/(1+i)^n
Negative Feedback Loop
A dampening mechanism that tends to make a system self-regulating
Negative Feedback in RE
The ability of the asset market to regulate the flow of financial capital to the development industry
How are the space markets and asset markets linked?
The space market determines the operating cash flows of the RE assets that make up the asset market, which informs the activity of the development industry
EAR Formula
Enter [n] and [i] then [CHS][PMT][FV]
Nominal Rate
The stated annual rate of interest before inflation is added
Bust Cycle
Space markets see an extended period of falling occupancy and rents
Risk Free Rate
The theoretical rate of return for an investment with no-risk including default risk. Compensates for pure time value of money.
Holding Period Return Formula
Income + (Ending value-beginning value)/beginning value
Advantages of IRR
- Time value of money
- Simplicity (easy measure to calculate)
- Hurdle rate not required
Disadvantages of IRR
- Ignores size of the project
- Doesn’t consider unplanned future costs
- Ignores reinvestment rates
Relationship between discount rate and valuation
Higher discount rate = lower asset values
Natural Vacancy
Long run vacancy in the market, indicates supply and demand
Vacancy Rate
% of built space that is not currently occupied (some vacancy is normal)
Constant Growth Perpetuity in Arrears Formula
value = cash flow/(discount rate-growth rate) OR cap rate
Discounted Cash Flow Analysis
The value of a property is equal to the expected future cash flows
DCF Formula
PV = CF1/(1+R)^1 + CF2/(1+R)^2…
Annualizing Returns Formula
(1+R)^(1/t)-1
Shadow Space
Space that it either sublet or unoccupied for growth, storage, etc.
Economies of Scale
Cheaper per unit to produce more at one place due to fixed costs
Location Quotient
(local industry employment/total local employment)/(national industry employment/total national employment)
Positive Locational Externalities
One firm benefits from another nearby (could be as few as two firms)
Return on Cost Formula (developer)
First stabilized year NOI/total project costs
Public Markets Equity Assets
Stocks, REITS, Mutual Funds, Exchange Traded Funds
Private Market Equity Assets
Real Property, Private Equity, Hedge Funds, Private REIT
Public Market Debt Assets
Bonds, Mortgaged-Backed Securities, Money Instruments, Mutual Funds, Exchange Traded Funds
Private Market Debt Assets
Bank Loans, Whole Mortgages, Venture Debt/Leveraged Buyouts
NPV Investment Rule
NPV>0: investment produces value above rate of return
NPV<0: investment does not produce value about rate of return
NPV = 0: the investment is at the return threshold
Internal Rate of Return (IRR)
The discount rate (%) that generates an NPV of 0
Return on Cost Formula (acquisition)
Potential NOI/Purchase Price
Cash-on-Cash Returns Formula
Annual before-tax cash flow/total equity invested
Hotel and convention demand drivers
- Air passenger volume
2. Tours receipts or number of visitors
Industrial demand drivers
- Manufacturing and transportation employment
- Airfreight volume
- Rail and truck volume
Office demand drivers
- Employment in office occupations
Retail demand drivers
- Aggregate disposable income
- Aggregate household wealth
- Traffic volume
Multifamily demand drivers
- Population
- Household formation
- Local housing affordability
- Employment growth (blue collar occupations)
Single family residential demand drivers
- Population
- Household formation
- Interest rates
- Employment growth (business and professional occupations)
Vacancy Rate Formula
Empty SF/Total SF
