i get around: real estate, development plans and transportation

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I GET AROUND: REAL ESTATE, DEVELOPMENT PLANS AND TRANSPORTATION Dr Matthew F Gebhardt October 18, 2013 Housing Land Advocates Conference

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I Get Around: Real Estate, Development Plans and Transportation. Dr Matthew F Gebhardt October 18, 2013 Housing Land Advocates Conference. Agenda. Supply and Demand and Housing Markets Assessment of Risk and Decision to Develop Portland’s Rental Market. Supply and Demand. Supply. - PowerPoint PPT Presentation

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Page 1: I  Get Around: Real Estate, Development Plans and Transportation

I GET AROUND: REAL ESTATE, DEVELOPMENT PLANS AND TRANSPORTATION

Dr Matthew F Gebhardt

October 18, 2013

Housing Land Advocates Conference

Page 2: I  Get Around: Real Estate, Development Plans and Transportation

Agenda

Supply and Demand and Housing Markets

Assessment of Risk and Decision to Develop

Portland’s Rental Market

Page 3: I  Get Around: Real Estate, Development Plans and Transportation

Supply and Demand

Page 4: I  Get Around: Real Estate, Development Plans and Transportation

SupplyPrice

QuantityO

S0S2

Decrease

S1

Increase

Page 5: I  Get Around: Real Estate, Development Plans and Transportation

Demand

QuantityO

D0

PriceD2

Decrease

D1

Increase

Page 6: I  Get Around: Real Estate, Development Plans and Transportation

Supply and Demand

O

Pe1

Qe1

S1

g h

D1

D2

Pe2

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i

Price

Quantity

S2

jPe3

Qe3

Page 7: I  Get Around: Real Estate, Development Plans and Transportation

Elasticity of Supply

P

QO

S0

D0 D1P

QO

S0D0 D1

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Qe1

Pe2

Qe2

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Page 8: I  Get Around: Real Estate, Development Plans and Transportation

Function of Housing Markets

Demand for housing depends on a wide variety of factors

Demand is determined by income, availability of substitutes and availability of complementary goods, rate of household formation, rate of mortgage interest, current housing price

Major factor in increased demand in Portland Metro Area is due to population growth, primarily from migration

Page 9: I  Get Around: Real Estate, Development Plans and Transportation
Page 10: I  Get Around: Real Estate, Development Plans and Transportation

Function of Housing Markets

Demand for housing is also extremely complex and fragmented

Big or small, near schools or near work, in Portland or Beaverton, buy or rent, old or new

Or maybe it’s simple: location, location, location

Page 11: I  Get Around: Real Estate, Development Plans and Transportation
Page 12: I  Get Around: Real Estate, Development Plans and Transportation

Distance from Center

Rent/Price

Bid-Rent

Page 13: I  Get Around: Real Estate, Development Plans and Transportation

Function of Housing Markets

Supply is also based on a wide variety of factors Price levels in the recent past (1-2 year lag) Interest rates Land available for housing with proper zoning Construction costs

Speculative housing construction can have an effect

Page 14: I  Get Around: Real Estate, Development Plans and Transportation

Function of Housing Markets

Housing markets do not function efficiently Imperfect information High search and transaction costs Stock variation

Tend to be highly localized Many submarkets

Prone to fluctuations

Page 15: I  Get Around: Real Estate, Development Plans and Transportation

Net Operating Income/Costs

Assessment of Risk

Page 16: I  Get Around: Real Estate, Development Plans and Transportation

Net Operating Income

Income after normal operating expenses have been deducted, but before non-operating expenses and debt service.

Calculation: Potential Gross Income- Vacancy and Concession Allowance Effective Gross Income- Operating Expenses Net Operating Income

Page 17: I  Get Around: Real Estate, Development Plans and Transportation

Gross Operating Income 250,000Vacancy Factor (5%) -12,500Rent Concessions (0.5%) -1,250Effective Gross Income (EGI) 236,250

Real Estate Taxes 7,500Insurance 5,000Advertising 1,000Management 10,000Building Maintenance/Repairs 20,000Landscape Maintenance 5,000Turning Expenses 12,500Garbage 5,000Utilities 20,000Sewer/Water 15,000Reserves 2,500Total Operating Expense -103,500

Net Operating Income (NOI) 132,750

Page 18: I  Get Around: Real Estate, Development Plans and Transportation

Construction Cost Estimates

Land Site preparation Infrastructure Hard Costs

Labor Materials

Soft Costs Marketing Operating

Legal fees Accounting costs Inspection costs Overhead/

administration Insurance Taxes Consultants

Contingencies Development fees

Page 19: I  Get Around: Real Estate, Development Plans and Transportation

Develop or Not?

Comparison of expected NOI from the property to the cost of developing the property

If expected NOI is too low or costs are too high the perceived risk of the project may be deemed too great to proceed

Even if developer is willing to accept a lower return

Page 20: I  Get Around: Real Estate, Development Plans and Transportation

($s)

Net Op. Inc.

Construction Costs

Page 21: I  Get Around: Real Estate, Development Plans and Transportation

Develop or Not?

Lower rents (lower NOI) or higher costs can make risk of undertaking development greater

Equation can be changed through increasing NOI through: More total units (higher densities – although

this increases costs) Mixing or changing the mix of units (more

market rate) Subsidizing rents

Page 22: I  Get Around: Real Estate, Development Plans and Transportation

Develop or Not?

It can also be changed by lowering costs including: Soft costs (design, entitlements) Finance costs (interest rates, more equity) Labor costs (non-union labor) Land costs (discounted land) Material costs (lower level finishes, smaller

units)

Of course, perception also plays a part

Page 23: I  Get Around: Real Estate, Development Plans and Transportation
Page 24: I  Get Around: Real Estate, Development Plans and Transportation

Portland Market

In Brief

Page 25: I  Get Around: Real Estate, Development Plans and Transportation

Housing Affordability

Affordability Defined as ability or inability to gain access to

housing at market prices

Regional Variation What constitutes affordable housing in Portland

is quite different than what constitutes affordable housing in San Francisco

Two approaches to measuring affordability: ratios and residuals

Page 26: I  Get Around: Real Estate, Development Plans and Transportation

Measuring Affordability

The ratio compares housing costs (prices, rents or mortgage payments) against income (wages, benefits, etc) It is often suggested 30-40% of household

income can reasonably be spent on housing

The residual looks at disposable income after the cost of a decent home have been deducted This suggests that there is an absolute

minimum disposable income required to sustain an acceptable quality of life; it is linked to poverty line estimates

Page 27: I  Get Around: Real Estate, Development Plans and Transportation

Portland Area Affordability

  Portland MetroOwner Occupied Housing Costs $1,471 $1,461 Renter Housing Costs $905 $934

% > 30% Portland MetroAll Households 40.20% 37.90%Renters 50.30% 49.40%

Source: 2012 ACS

Page 28: I  Get Around: Real Estate, Development Plans and Transportation

Portland Area Affordability

1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 3Q 130

0.5

1

1.5

2

2.5

3

3.5

4

Portland Metro Vacancy Rates

Source: Norris, Beggs and Simpson

5% = Full Occupancy

Page 29: I  Get Around: Real Estate, Development Plans and Transportation
Page 30: I  Get Around: Real Estate, Development Plans and Transportation

Trade-Offs

Possible to trade off housing costs and other costs, especially transportation costs

Pay more than 30-40% for housing but walk, bike or take transit to work

Not always simple to make that trade off and more difficult with rising transit costs and service reductions

Page 31: I  Get Around: Real Estate, Development Plans and Transportation

Questions? Answers?

Thank You for Listening!