chapter 3 central cities and regional market analysis

Chapter 3

Central Cities and Regional Market Analysis

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

Major Topics Why do cities exist? Why do cities of different sizes exist? What is a metropolitan statistical area? What are the primary causes of city

growth, stability or decline? Possible prototypes for cities of the

future


Why is city growth and decline important?

Understanding the causes will lead to better decisions of all types

> 90% of the value of US real estate is in urban and urbanizing areas

In the U.S., urban centers are very spread out


Key TermsCentral Cities

M.S.A.: “Metropolitan Statistical Area” >50,000 people

C.M.S.A.: “Consolidated M.S.A.”


Urbanized Land

U.S. Census Bureau (www.census.gov)recognizes, as of 1998:

340 MSAs in U.S.A., some of which are constituents of the 19 recognized CMSAs

Almost 80% of all U.S. residents reside in urbanized MSAs

MSAs constitute nearly 18% of total U.S. land area

“Urbanized” Land actually makes up less than 5% of the land area of U.S.


Essence of a “City”

1. A dense collection of inhabitants of relatively large population

2. Where none of the citizens make their living directly from agricultural activity

3. Where the social and economic relationships are relatively complex and hierarchical


“City-causing” phenomena

1. Economies of Scale

2. Economies of Agglomeration

3. Positive Locational Externalities

4. Fixed “break bulk” points and distribution centers

- Centripetal Forces

- Cumulative Causation


City Size: Rank/Size Rule

City Population =


Largest City’s Population

Rank of City

Cities of similar size tend to be located apart from each other geographically

Central Place Theory Developed by German geographer August

Losch

Problem of location on a Homogeneous “featureless plain”

The greater the economies of scale in industrial production, the fewer and further apart will be the optimal location pattern for the cities, all things being equal

The greater the transportation costs, the more numerous and closer together will be the cities


Central Place TheoryThe city (service area) assumes

hexagonal shape on a hexagonal plane (like a honeycomb)

Even spacing of cities – minimizes transportation costs


City A

Theory of Urban Hierarchy Developed by German geographer Walter

Christaller:

The optimal configuration of cities on the featureless plain includes an hierarchy in which “higher-order” cities are fewer and further apart than “lower-order” ones.

“Higher-order” cities: those containing functions which require more centralization

“Lower-order” cities: those containing functions which require less centralization

“Threshold Market”: minimum requirement to support an efficient production process


Theory of Urban Hierarchy

Traditional theory identifies seven “orders” of cities

Cities like New York, London, Tokyo, Hong Kong, Bangkok, Mexico City and a few others are seventh-order ones

Real estate terminology – “tiers” instead of “orders”

“Location theory”


Dynamics of City GrowthThe following factors influence the

dynamics of city growth:- Natural resources- Industrial production- Transportation facilities (land,

water, air)- Government offices- Financial services- Cultural and Social factors

(entrepreneurial talent)- Telecommunications- Technological developments


Projecting Growth

Economic Base

“Export Sector” Jobs

“Service Sector” Jobs

Export Base theory: Economic growth of the city or region is dependent entirely on growth in the export sector of the local economy


“Location Quotient”:

- The LQ helps in figuring out what jobs are part of the export sector.

- The LQ is defined as the proportion of total local employment in a given industry, divided by the proportion of total national employment in that same industry

- Only when the LQ significantly exceeds 1.0 is the industry part of the export sector.


Projecting Growth: Location Quotient

The number of jobs in the service sector greatly exceeds the number of jobs in the export sector. As a result, expansion in the export sector creates a “multiplier effect” on total local employment

Employment Multiplier:

=

Population Multiplier:

=


Net Total Employment Increase

Export Employment Increase

Net Total Population Increase

Export Employment Increase

Projecting Growth: Multiplier Effect

Typical Employment Multiplier ratios are in the

range of 2.0 to 4.0

Typical Population Multiplier ratios range from

2.5 to 9.0

It is important to note that the multiplier effect

goes both ways

To use the export based approach to economic

analysis:

1. Analyze location quotients on SIC classified

location quotients in an area

2. Forecast future employment prospects in

each of these groups“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

Projecting Growth: Multiplier Effect

Common trends among all MSAs

The large employer approach

Classification of cities

Relation between growth and returns for real-

estate

Local investment as a catalyst of growth

- Local government role in local investment

- Social Infrastructure investment,

especially EDUCATION

Local demographics factor

Policies to limit growth or increase growth“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

Economic Base analysis

Emphasis on mixed-use where retail and

residential and office and open spaces co-

exist such that transportation cost is

minimized and convenience maximized

Examples:

- Columbia, Maryland

- Celebration, Orlando

- Stapleton, Denver

- City Place, West Palm Beach


Future Master Planned Community Models

END


chapter 3 central cities and regional market analysis

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