Chapter 28: Economic Analysis of Investment in Real Estate ...

Chapter 28: Economic Analysis of Investment in Real

Estate Development Projects, Part 1

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Exhibit 2-2: The "Real Estate System": Interaction of the Space Market, Asset Market, & Development Industry

ADDS NEW

SPACE MARKET

SUPPLY (Landlords)

DEMAND (Tenants)

LOCAL &

NATIONAL ECONOMY

RENTS &

OCCUPANCY

FORECAST FUTURE

DEVELOPMENT INDUSTRY

IF YES

IS DEVELPT PROFITABLE

?

CONSTR

COST

INCLU LAND

ASSET MARKET

CASH FLOW

SUPPLY (Owners

Selling)

PROPERTY MARKET VALUE

MKT REQ'D

CAP RATE

DEMAND (Investors Buying)

CAPI TAL MKTS

= Causal flows.

= Information gathering & use.

2

Development is important: ? From a finance & investment perspective, but also ? From an urban development (physical, social, environmental) perspective...

Development is a multi-disciplinary, iterative process . . .

Political and Legal Analysis

Physical and Design Analysis

Financial Analysis

Market and Competitive Analysis

Image by MIT OCW.

The (famous) Graaskampian Spiral.

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Graaskamp also coined the concept that most development projects can be characterized as either:

? A use looking for a site, or ? A site looking for a use.

Use Looking for a Site: ?? Developer has a particular specialization, or ?? Developer is working for a specific user.

Site Looking for a Use: ?? Developer tries to determine & build the "HBU", or ?? Public entity seeks developer to build a use determined through a political process (presumably also "HBU").

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Exhibit 29-1a: Development Project Phases:

Typical Cumulative Capital Investment Profile and

$

Investment Risk Regimes

C U M U L A T I V E

R

I

S

K

VERY

HIGH RISK

e.g.: 40%

A

OCC

S

I N V E R S E

I

HIGH RISK

e.g.: 20%

S

N

OCC

U

V

C

E

C

S

MODERATE RISK E

T

e.g.: 10% OCC S

M

LOW RISK

S

E

e.g.: 8% OCC

N

P

T

R

O

LAND OPTIONING &

$

ASSEMBLY, PERMITTING, &

? CONSTRUCTION ?

LEASE-UP & TENANT FINISHES

STABILIZED ?

B

DEVLPT DESIGN

OPERATION

Time ?

LAND PURCHASE

SHELL COMPLETION

DEVLPMT ? COMPLETION

"Time 0"

"Time T1"

"Time T2"

= CUMULATIVE

INVESTMENT

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= RISK LEVEL

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