Instructors Manual to Accompany Real Estate Principles: A Value Approach Ling/Archer

Chapter 6
Market Determinants of Value
Chapter Overview
The main subject of this chapter is to provide a theoretical and methodological
foundation for market analysis. The chapter begins by offering three noticeable examples
of market misjudgments in real estate investments that resulted in devaluation or
complete failure of investments. It shows that market analysis is an important step in the
real estate investment process. The goal of the market analysis is simple and clear: the
investors ought to evaluate the market environment and the market determinants of value
in order to minimize market errors and maximize the value of investments.
The theoretical foundation of the market analysis is firmly built upon urban economics.
This chapter presents three aspects of the urban economic theory. First the creation
growth and decline of the cities are reviewed in an historical context and linked to the
modern study of urban economics. Furthermore the bid!rent theory is introduced as the
basis to explain the relationship of real estate value and the distance from the central
business district. "astly the basic models of urban forms are discussed in relation to
economic and technological development.
In terms of methodology the economic base multiplier approach is introduced in this
chapter as one of the main applications in this area. The concept of the economic base
industries in a metropolitan area serves as the linkage between real estate market growth
and the economic growth of a region. The location patterns of urban land use are
analyzed to associate different types of goods to the forms of land use.
Chapter Concepts
The creation growth and decline of cities
#id!rent functions the relationship of value and distance
The shapes and forms of cities
The impact of transportation and technology changes
"ocation pattern of urban land use
The role of urban analysis
Presentation Strategies
The materials presented in $hapter % are intuitive and easy to comprehend. &tudents can
be easily motivated to join class discussions on urban land use topics. The instructor may
find it easy to go with the flow' i.e. to follow the materials presented in the text and
(ower(oint presentations. $onsider using a sufficient number of diagrams when the
urban forms and patterns are explained.
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Instructors Manual to Accompany Real Estate Principles: A Value Approach Ling/Archer
Presentation Outline
1. Market Misjugments in !eal "state an #heir $mpacts
The chapter takes the students back in time to the )*+,s when most downtowns of the
-nited &tates witnessed a real estate boom characterized by skyscrapers which later
unfortunately turned into historical levels of vacancy. To motivate the interest of the
students three intriguing examples of large economic disasters in history are provided:
the (ruitt!Igoe public housing project .)*/01 the new community of 2eston 3irginia
.)*%41 and the Florida $enter another new community near 5alt 6isney 5orld in
7rlando developed by the 8ulf 7il $ompany. 9lthough these examples are not
presented in the (ower(oint slides it is worth a mention at the beginning of the class'
possibly as a :uestion on the reading assignment.
((T 4 summarizes the ways to minimize market risk and to prevent market disasters
similar to the ones mentioned above.
((T 4: 5ays to ;inimize ;arket 2isk
-rban real estate markets derive from the urban economy. -rban land use patterns
dictate real estate location patterns. The relationship of the urban real estate market and
the urban economy is addressed in ((T <.
((T <: -rban 2eal =state ;arkets 6erive from the -rban =conomy
%. #he Creation& 'rowth& an Decline of Cities
It is commonly understood that economic activities give rise to cities but where cities
occur and what forms cities take are intriguing :uestions for students to ponder. 6emand
and thus competition for access cause cities to form .((T 01. $ities were formed as a
fortress or religious center in the pre!industrial era and were later developed along trade
routes from river to railroads .((T /1. &ome cities were also founded based on the
natural resources available in the region. 5hat about the major cities in your state and
the city where you are>
((T 0: 6emand for 9ccess: the 8ravity that $reates $ities
((T /: 5here $ities 7ccurred
(. #he "conomic )ase of a Cit*
The economic base is a set of economic activities that a city provides for the world
beyond its boundaries. The economic base of a city determines its growth or decline.
The economic base multiplier techni:ue is analyzed with great details in this section.
=xamples of great -.&. cities are presented in ((T %. ((Ts + and ? lay out the
fundamental concepts of the economic base methodology. 9dditional information
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hapter !
websites are provided on ((T ), to encourage students to use the data available on the
internet to conduct analyses of the community economic base.
((T %: 8reatest $ities @ave =xperienced &e:uence of A#asesB
((T +: =conomic #ase .6efinitions1
((T ?: =conomic #ase ;ultiplier
((T *: The =conomic #ase ;ultiplier .6iagram1
((T ),: Indicators of an =conomic #ase .5ebsites1
To demonstrate the method the location :uotient is introduced as a :uick indicator of
economic base analysis .((T ))1. It offers an example to compute the population of a
city using education as a basic industry in that city.
((T )): "ocation Cuotient as a Cuick Indicator of =conomic #ase
Furthermore supply factors impacting a community economic base are discussed at
length in ((Ts )4!)0. The implications of the contemporary industry and agglomeration
economies are emphasized in ((T )/.
((T )4: &upply Factors 9ffecting a $ommunity =conomic #ase
((T )<: 9dditional &upply Factors
((T )0: Implications of Industry and 9gglomeration =conomies
+. #he Shape of a Cit*
The distance from the central business district is directly associated with transportation
cost and this cost serves as an Aeconomic gravity.B The demand for proximity causes
economic users to bid for locations which results in a bid!rent function determining the
land use density patterns and thus the shape of the city. ((T )/ presents the assumptions
for the bid!rent model. 9 one!user example is illustrated in ((Ts )% and )+.
((T )/: The &hape of a $ity: 6emand for 9ccess and "ocation 2ent
((T )%: 5hat 5orkers #id to #e $loser
((T )+: The Implied #id!rent $urve
To demonstrate rent gradients for multiple types of households a few examples are
offered in the text and in the (ower(oint presentations. First a two!user model featured
with a walker and a driver is developed in ((Ts )? and )* to demonstrate the effect of
transportation cost.
((T )?: #id!2ent $urves and 2ent 8radients with 5alkers
((T )*: 2ent 8radient with 6rivers and 5alkers
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Instructors Manual to Accompany Real Estate Principles: A Value Approach Ling/Archer
Furthermore a two!user model featured with a walker and a doctor is simulated in ((Ts
4, and 4) revealing the affect of trend fre:uency and opportunity cost upon the demand
for proximity.
((T 4,: 2ent 8radients with 5alkers and 6octors .6iscussion1
((T 4): 2ent 8radient with 6rivers 5alkers and 6octors .=xhibit1
"astly a community medical center is further utilized as an example to demonstrate the
interactive effect of demand for access of five different types of land use functions that
result in multiple centers in a city .((Ts 44 and 4<1. The bid!rent theory is compared
with the urban land use reality in the -nited &tates in ((T 4/.
((T 44: 2ent 8radient with ;edical $enter outside $#6 .6iscussion1
((T 4<: 2ent 8radient with ;edical $enter .=xhibit1
((T 40: 2ent 8radient with ;edical $enter 7utside $#6 .=ffects1
((T 4/: #id!2ent $urves versus The 2eality of -rban "and -ses
,. Changing #ransportation& Changing #echnolog*& an Changing -r.an /orm
In this section three classic models of urban land uses: the concentric circle model
&ector model and multi!nuclei model are presented .((Ts 4%!4?1.
((T 4%: Three 7bserved (atterns of -rban Form
((T 4+: 7bserved (atterns of -rban Form .$oncentric $ircle ;odel1
((T 4?: 7bserved (atterns of -rban Form .&ector ;odel1
&econdly the text and the (ower(oint slides outline the technological changes in the 4,
th
century. The urban transportation revolution the production revolution and the technical
changes in air conditioning lighting etc. directly impact the land use patterns in urban
areas. These effects are summarized in ((Ts 4*!<) with compelling statistics.
((T 4*: Technical $hanges from )*4, to the (resent
((T <,: Technical $hanges from )*4, to the (resent .$ontinued1
((T <): Technical $hanges from )*4, to the (resent .$ontinued1
((T <4: =ffects of Technological $hange on -rban Form
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hapter !
6. Differing 0ocation Patterns of -r.an 0an -ses
A5hat are the three most important factors in real estate investments>B ;ost students
would be able to answer this :uestion correctly Alocation location and location.B #ut
how location theory works in an intra!urban context is a much more complex issue.
Intra!urban land use patterns residential industrial educational medical and others are
introduced in this section. Two cities: Dacksonville Florida and $hicago Illinois are
presented as examples to demonstrate change of urban land use patterns .((Ts <<!<%1.
((T <<: Dacksonville Florida )*//
((T <0: Dacksonville Florida )*?/
((T </: $hicago )*<*
((T <%: $hicago )*?/
;ore discussions are provided on the theories of intra!urban location patterns .((Ts <% !
<?1. The concept of Aconvenience goodsB as provided by general stores are introduced in
((T <+ which exemplifies the determination of maximum market area .((T <?1 and the
clustering of such maximum market areas to form the urban context at large .((T <*1.
3ariations of such location patterns are discussed in ((T 0,. "astly ((T 0) summarizes
the implications of location theories on real estate market analysis which enriches the
meaning of Alocation location and location.B
((T <+: 3ariations on Intra!urban "ocation (atterns
((T <?: ;aximum ;arket 9rea
((T <*: Idealized "ocation (attern of $onvenience 8oods and &ervices
((T 0,: 3ariations on Intra!urban "ocation (atterns
((T 0): &ome Implications for 2eal =state ;arket 9nalysis
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