11.433J / J Real Estate Economics

Transcription

1 MIT OpenCourseWare J / J Real Estate Economics Fall 2008 For information about citing these materials or our Terms of Use, visit:

2 Week 10: Commercial Markets Tracking markets with data: absorption, vacancy, rent, completions and construction. Office space: economic sectors, rental elasticity, technology and the workplace. Industrial space: inventories, manufacturing, R&D. Retail space: centers versus stand-alones, sales, income, obsolescence. Hotels: Is there more than GDP?

3 Some Market Accounting Fundamentals v t : Vacancy Rate (vs availability rate ) S t : Stock of Space C t : Construction starts of new space Ab t : net absorption of space L t : Average lease term N t : Average Renewal rate Ab t = (1-v t )S t -(1-v t-1 )S t-1 S t = S t-1 + C t-n Gross Abs = S t (1-N t )/L t Average Lease up time = v t /[(1-N t )/L t ]

4 A lease Rent index: Average, Repeat, Hedonic Rent (CB Vouchers) (average annual$/sqft over lease term) log(r) = α 0 + α 1 SQFT + α 2 GROSS1 + α 3 GROSS2 + α 4 TERM + α 5 HIGH 1991 n + α 6 NEW1 + α 7 NEW2 + Σ β i D i + Σ δ j S j (1) i=1979 j=1 Variable Denver Cincinnati Houston San Francisco Washington Constant Square Feet 1.08e e e e e-07 1 G G Term High Dummy na na na Dummy na na Dummy na Dummy Dummy Dummy Dummy Dummy

5 Lease (Rent) Fundamentals: An Efficient forward market implies: R t,n = R t,n-m + R t+n-m,m [The first superscript designates the date for which occupancy begins, the second the lease term] or: the difference between a three year lease and a 5 year lease signed today equals a forward commitment (three years hence) for a 2 year lease. Hence if the market is expected to improve, longer lease terms command a higher average rent and vice-versa. How to test the efficiency theory?

6 For the last 25 years, on average lease rent is 2%+ higher for each year longer in Term. But yearly, this varies inversely with market vacancy. Why? (Minneapolis Data) Term Vacancy

7 In Most Markets large blocks of space rent for less than small! Why isn t the whole worth more than the sum of the parts? Size Discount in Office M arket Space Discount Real TWR Rents Forecast5y20k Forecast5y100k RealGap20KRent RealGap100KRent

8 Lease - versus Own? Tax implication? Leases are deductions, as are debt payments. Accounting implications? Only ownership shows on the balance sheet (loophole). Corporate Prestige. But you can easily purchase the naming rights to a building. Firm Specific Capital. Facility has little other use, and so developer would charge higher lease payments since residual value is zero. Holdup issue. Expansion and other options.[see: Benjamin, et.al.] Correlation between firm s business and local real estate market. If your corporate cost of capital is I c, how is I c P>< R?

9 Office (3,110 million sq. ft) Office and Industrial Space Usage in square feet by Tenure, 1991 (50 metro areas CBRE) Single Owner Single Renter Multiple Owners Multiple Renters Industrial (9,055 million sq. ft) Multiple Owners Multiple Renters Single Owner Single Renter

10 The North American Industry Classification System (NAICS) & Office Employment 11 Agriculture, Forestry, Fishing, and Hunting 21 Mining 22 Utilities 23 Construction Manufacturing 42 Wholesale Trade Retail Trade Transportation and Warehousing 51 Information 52 Finance and Insurance 53 Real Estate and Rental and Leasing 54 Professional, Scientific and Technical Services 55 Management of Companies and Enterprises 56 Administrative and Support and Waste Management and Remediation Services 61 Educational Services 62 Health Care and Social Assistance 71 Arts, Entertainment and Recreation 72 Accommodation and Food Services 81 Other Services (except Public Administration) 92 Public Administration

11 Office Space usage by SIC Office Employment* in Dallas and Chicago, 1989 Dallas Chicago Standard Industrial Classification (SIC) Total (thousands) Office (thousands) Total (thousands) Office (thousands) Manufacturing Mining Construction Transportation, Communication, and Utilities (TCU) Trade Finance, Insruance, and Real Estate (FIRE) Services ** Total Private * Those employees occupying separate office space from on-site manufacturing adapted from DiPasquale and Wheaton (1996) ** includes advertising, computer and data processing, credit reporting, mailing and reproduction, legal and social services, membership organizations, engineering and management services.

12 Rental Elasticity of Office Space Demand [see also: Hakfoort and Lie] 600 Office space per square foot and rent in US$ All sectors/all cities 500 Avg sq. ft per worker Rent in US$ per sq. ft Figure by MIT OpenCourseWare.

13 Square feet/worker. Changes in professional Occupation ratio: Rental cost of occupancy, technology? Occupied Square Feet Per Worker TW Rent Index, 2004$ psqft Occupied sqft Per Worker TW Rent Index, 2004$

14 Impact of Technology: Breakdown of Workers at Home (x1000) Growth (%) Total at Home 19,967 21, Paid 7,432 10, Hours or More Full-time, not self-employed 1,070 1, Source: Bureau of Labor Statistics, Torto Wheaton Research

15 Investment, Office Employment and Office Net Absorption ( ): bricks vs clicks 25% 20% 15% 10% 5% 0% -5% -10% -15% Office Employment Real Private Non-res Investment Net Absorption

16 How to Explain the recent Absorption Deficit Across Markets (1992 q1 to 1999 q4) 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% Tampa Fort Worth Orlando Austin Wilmington Jacksonville Detroit Ventura County Houston Cleveland Boston Washington DC St. Louis Orange County Oakland Long Island Los Angeles Las Vegas

17 Across Markets, Deficit Explained by Numerous Factors (dependent variable: office job growth absorption) Multiple R R Square Adjusted R Square Standard Error Observations 53 Coefficients Standard Error t Stat Intercept % of 1999 Single-Tenant Stock less % 1992 Single-Tenant Stock % of New Office Using Service jobs from 92to99 that Were B&P Multi-Tenant Office Stock FIRE Employment as % of all Office Employment Average quarterly TW Rent growth (1999.4$) to Variable Observations % of 1999 Single-Tenant Stock less % 1992 Single-Tenant Stock Essentially Part of the Intercept % of New Office Using Service jobs from 92to99 that Were B&P More B&P Employment, Bigger Deficit Multi-Tenant Office Stock Weak Evidence that Deficit is Smaller in Larger Markets FIRE Employment as % of all Office Employment Smaller Deficit in Markets With FIRE Concentration Average quarterly TW Rent growth (1999.4$) to The Demand for Space is Sensitive to Rental Growth

18 225 MIT Center for Real Estate Office Tenant Base: Increasingly Smaller Service Companies, Less Large Financial Companies Change in Jobs x 1, Financial Activities Office-Services TWR Office Outlook XL

19 Industrial Space Occupancy by SIC and Building Use (CBRE, 1991) Industrial Tenants, 1991 Building Use (millions of sq. ft) Industry of Occupant (SIC) Manufacturing Distribution R & D Other Total Manufacturing , Transportation / Communication / Utilities (TCU) Wholesale Trade , Retail Trade Services Other Total , adapted from DiPasquale and Wheaton (1996)

20 Velocity (J.I.T. technology) = Shipments (sales) / Inventories Index 1980 = 100 (Billions $, seasonally adjusted) Sales/GDP Inventories/GDP Inventories/Sales

21 Warehouse Demand: Δ Space/worker (+10%)= Δ space/$inventory (-60%) + Δ $ inventory/worker (+70%) Whs Occupied Sqft Per Worker Whs Occupied Sqft Per Inventories

22 Industrial demand: Δspace/worker (+40%) = Δproduction/worker (+70%) + Δspace/production (-30%) Mfg Occupied Sqft Per Worker Mfg Occupied Sqft Per Ind Prod

23 Logistics (S.C.M.): what enters the country at one place does not stay there!

24 Logistics (S.C.M.): what determines which port is used by whom, for what, from where? NA Import Traffic [U.S./Canada/Mexico Container Traffic (TEUs)]

25 Trade Flows and Warehouse Demand. Why do: Imports need more space than exports? Ports often need none? Whs. Net Absorption (sf x 1000) 250, , , ,000 50, ,000 YoY % Growth in X,M (BoP basis, 25% 20% 15% 10% 5% 0% -5% -100,000-10% Whs Net Absorption (sf x 1000) (L) Export Growth (R) Import Growth (R)

26 Retail sales closely follow personal income, but grow at only 80% of the rate! (times series studies have difficulty identifying additional demographic effects) Real Income Grow th Real Retail Sales Grow th

27 Retail Sales across 52 cities: more than just personal income: labor force participation and climate matter as well. Clothing (logs): sales/pop =.41 inc/pop +.37 emp/pop +.45 Jan Temp -.03 pop [R 2 :.53] Food/Beverage eaten in (logs): sales/pop =.89 inc/pop -.26 emp/pop MIT CRE Thesis: Jan Temp -.06 pop [R 2 :.58]

28 Some contend that housing wealth impacts retail demand, but Housing Wealth has had only Small Impact on Consumption! Much of recent housing Wealth Gains Went Back into Housing! Consumption rate, % share of disposable income Existing single family house price, % change year ago Consumption Rate (L) House Prices (R)

29 MIT Center for Real Estate Hence going forward Housing Related Sales are going to Suffer the most Year/Year Change (%) Core Sales Almost at 2003 Minimum 1998Q1 1998Q2 1998Q3 1998Q4 1999Q1 1999Q2 1999Q3 1999Q4 2000Q1 2000Q2 2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 Housing Related Non-Housing Related Source: BOC.

30 growth of: Retail store Sales (from establishments), and alternative measures of retail square feet. Is the US over supplied with retail space or is demolition widespread? Restaurant and Entertainment: 102% Furniture: 79% Building Materials: 78% Other Hard goods (Appliance ): 68% GM: 46% Clothing: 31% Food at home 26% Personal Income: 83%% Neighborhood Centers (NRB): 143% (net) Regional Malls(NRB): 238% (net) All retail space (FW Dodge) 117% (gross)

31 But is Construction Moving Beyond the Shopping Center Format? Walmart? Millions of $ ,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Sqft (x 1,000) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Value put in Place (millions of $2001) Shopping Center Sqft (x 1,000)

32 The small E-Commerce Share doubles every 3-4 years: Will clicks cannibalize Bricks next decade? Q4 00Q2 00Q4 01Q2 01Q4 02Q2 02Q4 03Q2 03Q4 04Q2 04q4 05q2 05q4 0.6 Retail sales, % change year ago (L) E-commerce, % change year ago (L) E-commerce, % of total (R)

33 The Lodging Industry (Smith Travel Research) [200 national hotel chains] Rooms available (potential nights) = supply Change in Rooms available = net additions Rooms sold = demand Change in Rooms Sold = absorption Rooms Sold/Available = occupancy ADR = Total room revenue/rooms sold REVPAR = ADR x occupancy

34 National Hotel Market Rooms Sold vs. Real GDP: GDP and room rates are all that matter! Rooms Sold Real GDP

35 Can you detect the rental elasticity of hotel demand? real income rooms sold Real Room Rate

36 Full Service Hotels at 9/11: Learning from the first Iraq war! National Model Forecasts from 2002 (1 st Quarter) 80,000 60,000 Forecast Completions/Absorption (Number of Rooms) 40,000 20, ,000-40, Occupancy Rate (%) -60, Completions Absorption Occupancy

37 Just as Forecast: A Remarkable Post 9/11Turnaround: Occupancy first then ADR = Mean Reversion Forecast 150 Real ADR Index ($ per room night) Occupancy Rate, % TWR Real ADR Occupancy