Eco & Market analysis question in real estate

TOPIC 1

ECONOMIC ANALYSIS AND REAL ESTATE INVESTMENT

ECONOMIC ANALYSIS: The analysis of markets and empirical economic data for the purpose of evaluating and estimating future economic activity.

Gross Domestic Product (GDP), is the summary statistic for the general health of an economy. Often referred to as income, GDP is more generally defined as the value of all goods and services produced by labor and property located in an economy.

GDP = C + I + G + (X-M)

where,

C= consumption of goods and services

I = private domestic investment

G= government (consumption and investment)

X= exports

M= imports

Growth, changes in GDP and its components, is the focus of most economic analysis.

For the US national economy as of 1Q2017 (annualized trillion dollars, percent changes adjusted for inflation listed below, rounding errors adjusted to fit):

19.2= 13.3 + 3.2 + 3.3 + (2.3 – 2.9)

(1.8) (3.3) (3.6) (-0.3) (nm)

Annualized growth rates in real dollars: dollar values corrected for gains or losses of purchasing power attributable to inflation:

A closely related measure of income is Gross National Product. GNP is the value of goods and services produced by an economy’s citizenry, regardless of their location, i.e. GDP adjusted for income from international locations.

The US is a net importer and the trade deficit has generally increased over the last 30 years.

Economic indicators are categorized as:

· Leading: indicators that signal future changes in economic growth

· Coincident: indicators that reflect current changes in economic activity

· Lagging: indicators that reflect past changes in economic activity

Key Economic Indicators include:

Leading Coincident Lagging

Plant & equipment orders Prices Unemployment

NAPM Industrial production Inventory/Sales

DOW Personal Income Interest Rates

Consumer confidence Consumer confidence Consumer con.

Current Issues:

Monetary Normalization Infrastructure Investment

Global ZIRP Wage & Income Growth

WHAT IS MARKET ANALYSIS?

Real estate market analysis is the identification and study of demand and supply, usually for the purpose of real estate investment and development. Market analysis forms the basis for decisions regarding location and site, size, design and quality, features, and target use. Development projects should match locational demands of firms and households and satisfy those demands competitively. Market analysis continues through the development and eventual disposition of the project, particularly in unfamiliar or highly competitive markets. Real estate market analysis provides guidance for the many decision-makers, both private and public sector professionals involved in real estate development

A CRITICAL FLAW OF MANY MARKET ANALYSES IS PRESENTATION OF DATA WITHOUT ANALYSIS

· Qualitative analysis is becoming increasingly important, especially as markets become more segmented and specialized; traditional statistical models and formulas that rely on large data pools do not work in assessing realism of goals and objectives

· Large informal component made up of experience, observation, interdisciplinary analysis

· Must keep up with national and regional market trends: strong vs. weak market; monitor changes as they occur

WHAT IS URBAN ECONOMICS?

Urban economics explores the where of economic activity:

· the study of the location choices of firms and households

· spatial aspects of sub-national economies and public policy

Why urban economics?

· 75% of national employment resides in urban areas

· urban economics also examines location choices within cities

· the most important problems caused by location choices occur in urban areas

AGGLOMERATION: favorable externalities, external economies of scale, resulting from proximity to other businesses that ultimately reduce business costs and argue for spatial concentration, i.e. gains to firms from locating near similar firms, suppliers and customers.

· Localization economies: benefits that arise from proximity to firms in same industry

· Urbanization economies: benefits that arise from proximity to many different economic actors

Paul Krugman: neoclassical theory fails to explain rise of particular places central reason for agglomeration assumed away.

–By admitting external economies of scale, concentration in space is efficient.