The DiPasquale-Wheaton Four Quadrant model. Man Cho (KDISchool) Stephen Malpezzi (U. of Wisconsin) Kyung-Hwan Kim (Sogang University)

Transcription

1 The DiPasquale-Wheaton Four Quadrant model Man Cho (KDISchool) Stephen Malpezzi (U. of Wisconsin) Kyung-Hwan Kim (Sogang University)

2 Market for real estate space Supply: Property Owners (Landlords) MARKE T Demand: Property Users (Tenants) Rents (e.g.$/sf) Total Space (SF) 2

3 Demand side: Users require specific types of space A lawyer can t use a warehouse. A trucking firm can t use a high-rise office building. Users require specific locations (or types of locations) A lawyer won t get much business at the intersection of a highway. A trucking firm s trucks would spend all their time stuck in traffic if their warehouses were located in downtown. 3

4 Supply side: Buildings are of specific physical types (warehouses high-rise offices). Buildings are in specific locations (and they can t move!). 4

5 Market for real estate asset Supply: Investors Wanting to Sell MARKET Demand: Investors Wanting to Buy Property Prices Cap Rates 5

6 For investors perspective Real Estate Assets = Future Cash Flows Cash is fungible. Cash is cash is cash, whether it comes from real estate, stocks, or bonds. Real estate assets compete against stocks & bonds. The real estate asset market is part of the broader capital market. 6

7 The Real Estate System : Interaction of the Space Market, Asset Market, & Development Industry ADDS NEW SUPPLY (Landlords) SPACE MARKET DEMAND (Tenants) LOCAL & NATIONAL ECONOMY RENTS & OCCUPANCY FORECAST FUTURE DEVELOPMENT INDUSTRY ASSET MARKET IF YES IS DEVELPT PROFITABLE? CASH FLOW SUPPLY (Owners Selling) CAPITAL CONSTR COST INCLU LAND PROPERTY MARKET VALUE MKT REQ D CAP RATE DEMAND (Investors Buying) MARKETS 7 Source: Geltner et al. (2007) = Causal flows. = Information gathering & use.

8 Real estate space market (Quadrant I) Rent I. Market for RE Space: Rent Determination S1 R * R * S2 D (R, Economy ) = S S D(R, Economy) = S 0 S * S * Space (sq. meter) 8

9 Real estate asset market (Quadrant II) Price P = R / I II. Market for RE Asset: Value Determination P = R / i P * P * 0 R * Rent 9

10 New construction (Quadrant III) Construction III. Market for New Construction: Flow of New Space C = C(P, LUC) C = C(P, LUC ) C * C * 0 P * Price 10

11 Stock adjustment (Quadrant IV) Stock IV. Market for RE Stock: Net Adjustment DS = C δs = 0; S = C/ δ S * 11 0 C * Construction

12 Putting 4 Quadrants All Together II. Market for RE Asset: Value Determination P = R / i Rent S I. Market for RE Space: Rent Determination R * D (R, Economy ) = S D(R, Economy) = S Price P * S * Space (sq. meter) C * III. Market for New Construction: Flow of New Space C = f(p, LUC) New Construction DS = C - δs IV. Market for RE Stock: Net Adjustment 12

13 Some insights of the 4 Quadrant Model Integrates stocks and flows in a simple framework Comparative static model; not a true dynamic model Easy to solve graphically for qualitative changes It s a little tricky to solve for actual numbers because the four equations are simultaneous. Spreadsheet model can do some of the work for us, using Excel s Solver add-in. 13

14 Analysis with the 4QM Demand for real estate by foreign investors incr eases. 4QM cap rates fall (QIV). Asset prices rise. But supply response (QIII) increases stock of space, rents fall (QI), moderating original asset price i ncrease. Demand for real estate increases from the office sector. 4QM Demand shifts out (QI), values rise. Note difference between shifts in space demand and asset demand! 14

15 Further analysis with the 4QM Mortgage rates fall. 4QM When long term rates fall, then existing yield from real estate becomes higher in relative terms. Investment demand increases. Cap rates fall (QIV), supply up (QIII), rents fall (QI). Short term interest rates fall. 4QM Higher short term rates (holding long term rates constant) shift the costs of development (QIII), lowers the stock of space (QII), rents rise (QI), asset prices rise with costs (QIV). Many other scenarios possible, e.g. an increase in public housing, growth management, tax changes. 15

16 Calibrating the 4QM Following DiPasquale and Wheaton (1996, p. 8), we specify the relationships in our FQM as follows: (1) S = E(400-10R) (2) C = δ*s (3) P = C (4) R = ip Where do these numbers come from? How can we calibrate the model? 16

17 Colwell s extension (2002)