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Cornell UniversityHADM 42803. Real Estate Market Analysis

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Real Estate Market Analysis Wally Boudry Spring 2016151,000 jobs added in January was well below forecasts. Is this a blip or the start of a trend?? Quit rate is highest since the recession. Suggests people are very comfortable with the labor market and wage flationWhat is it all about?  We want to put the supply and demand dynamics from the real estate system framework into numbers  But big picture, market analysis should answer the following question:  Do I want to be in this market?  You can’t move your property if it turns out its location is bad  So you better be sure you like the location!  The more exposed the property is to the market, the more important the answer to this question becomes  The other benefit of market analysis is that it may give you many of the unknown inputs you need to value your property (rents, vacancy etc.)  Or at least a stabilized version of it…What am I worried about?  Falling rents -> Lower cash flows -> Lower Value  What I don’t want to happen is that I buy a property and then rents start to fall  This is true both as a debt and an equity investor  This is even true with long term leases because the leases will eventually roll (this is what I means by being “exposed to the market”)  Remember from last time that rents are an equilibrium outcome of supply and demand in the space market  We will need to know what is happening to both supply and demand to understand what is happening, or is likely to happen, to rentsRent  You need to be careful when talking about rents:  Asking Rent: is the asking rate of rent. Think of this as the sticker price on a new car  Effective Rent: this is the rent the tenant is actually paying.  Be careful: sometimes effective rent is “asking less free rent” sometimes it is “asking rent less free rent and TI amortization”  Rent data usually comes from surveys and what you are getting is asking rent. In a soft market, the effective rent may be much lower due to the concession that landlords are giving to get tenants in the door.  Landlords will also give large TIs in soft markets instead of free rent.  What does the spread between asking and effective rents tell us?

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