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Real Estate Process
© JR DeLisle, Ph. D.
Lecture 1: Real Estate Process Overview
byJames R. DeLisle, Ph.D.
September 30, 2009
Real Estate Process
© JR DeLisle, Ph. D.Lecture Overview
• Course Overview
• The Real Estate Process
• The Nature of Value
• Decision-making in Real Estate
• Introduction to Risk Management
Real Estate Process
© JR DeLisle, Ph. D.Course Objectives
• Develop a conceptual understanding of:– Real estate market at the macro and micro levels,– Linkages between the spatial and capital markets,– Integration of property, asset and portfolio management, and– Roles, drivers, and decision-making processes of major classes of space users,
producers, and investors.
• Cultivate an appreciation for:– Sustainable development, operation, transaction and investment, and– Integrate related disciplines to support real estate decision-making with the
appropriate breadth and depth of inquiry.
• Be able to make decisions drawing on:– Industry best practices, academic and theoretical concepts, and an– Understanding of basic technical and analytical tools.
Real Estate Process
© JR DeLisle, Ph. D.Course Organization: Grading Policy
• Grading Philosophy– Basis: curved– Emphasis: achievement vs. process/speed
• Grading Components– Participation/Peer Review 10%– Quizzes 50%– Final Exam 10%– Research Project 30%
Real Estate Process
© JR DeLisle, Ph. D.Course Components
• Textbook– Real Estate Principles
• Lectures– In PowerPoint format– Access via Moodle
• Cases & Tutorials– In Word/PDF– Access via http://jrdelisle.com
• Quizzes– In Moodle– Grade: Average of 2; best of calculated questions unlimited
attempts
Real Estate Process
© JR DeLisle, Ph. D.Textbook
• Real Estate Principles: A Value Approach, 2/e– David C. Ling, University of Florida– Wayne R. Archer, University of Florida
• Student Learning Center: On-line
Real Estate Process
© JR DeLisle, Ph. D.The Wheel of Thought
Purpose,Goal
QuestionAt Issue
Information,Data, Facts
Point ofView
Implications,Consequences
Assumptions
Concepts,Theories
Inferences,Conclusions
Real Estate Process
© JR DeLisle, Ph. D.Critical Thinking
• The Reality– Everyone thinks– Not everyone thinks critically
• The Problem– Much thinking is biased, distorted, partial, uninformed– It affects the quality of our lives & what we produce, make, or
build• The Goal
– The ability to think critically and objectively– The ability to achieve excellence in thought
• Achieving the Goal– A systematic thought process must be cultivated– A holistic approach must be applied ensuring breadth and depth of
inquiry
Real Estate Process
© JR DeLisle, Ph. D.What is Critical Thinking and How Does it Work?
• Definition of “Thinking”– Critical thinking is the art of analyzing and evaluating thinking to improve it– Effective critical thinking is purposeful, focused and action-oriented
• What it Involves– Raises vital questions and problems, formulating them clearly and precisely– Gathers and assesses relevant information, using abstract ideas to interpret it– Comes to well-reasoned conclusions and solutions– Tests them against relevant criteria and standards– Thinks open mindedly within alternative systems of thought, recognizing– Assesses their assumptions, implications, and practical consequences– Communicates effectively with others in solving complex problems.
Real Estate Process
© JR DeLisle, Ph. D.The Definition of Real Estate
Space-time
Money-time
Artificially delineated space over time with a fixed reference point to the earth…
Real Estate Process
© JR DeLisle, Ph. D.Real Estate: The Dirt Beneath the Deal
Real Estate Process
© JR DeLisle, Ph. D.Real Estate 101 Quiz
l Who created real estate?G … o …
G O V E R N M E N T ……
Real Estate Process
© JR DeLisle, Ph. D.Real Estate: Value Creation in Real Estate
Real Estate Process
© JR DeLisle, Ph. D.Dimensionality of Real Estate
What are the three key dimensions of Real Estate?
Linkages
Environment
Static
S…. E….. L ….
S…. E…. L….
Real Estate Process
© JR DeLisle, Ph. D.Unique Element: Spatial Anchor
• Market• Submarket• Trade Area• Neighborhood• Block
© JR DeLisle, Ph. D.Runstad Center for Real Estate Studies
Trade Areas: Redmond
photos courtesy of Aerolistphoto.com.
RedmondTown Center
Trade Area???
© JR DeLisle, Ph. D.Runstad Center for Real Estate Studies
Analytical Tools: GIS & Spatial Analysis
Seattle TigerZoomArea
Real Estate Process
© JR DeLisle, Ph. D.Three Major Attributes of Real Estate
The old axiom: the three major attributes of real estate:
– L,– L,– L.
Real Estate Process
© JR DeLisle, Ph. D.Three Major Attributes of Real Estate
The old axiom: the three major attributes of real estate:
– L,– L,– L.
. . . . . . . ulnerable,
. . . . . . . ulnerable,
. . . . . . . ulnerable.
Real Estate Process
© JR DeLisle, Ph. D.Graaskamp on Social Responsibility
Man is the only animal that builds his terrarium about him as he goes and real estate is the business of building that terrarium. So we have a tremendous ethical content, tremendous social purpose. The student is looking for a field in which entrepreneurship and a way of life can be integrated into social purpose. We like to argue that the entrepreneurship of tomorrow is going to be the individual who can inventively implement social policy.
Real Estate Process
© JR DeLisle, Ph. D.Three Participants in Real Estate Process
Space Producers
Space Consumers
Infrastructure Providers
Real Estate Process
© JR DeLisle, Ph. D.
Rising Rents
Technology
MarketInefficiency
Growth MaturityDecline
Real Estate Cycles: Vacancy and Construction
NormativeConstruction: Expanding Demand
Actual SpeculativeConstruction
% Occupied Stock
Real Estate Process
© JR DeLisle, Ph. D.The Real Estate Process: Space-Time
Real Estate Process
© JR DeLisle, Ph. D.Property-Type Stratification
Real Estate Process
© JR DeLisle, Ph. D.Which Market Segments?
Upscale City Singles
Major Market Core
Metro Fringes
Second City Leaders
Affluent Suburbia
AnomolousLifestyles
Real Estate Process
© JR DeLisle, Ph. D.
S. ATLANTA
N. W EST
M I DTO W N
N. FULTO N
CBD
BUCK H EAD
N. EAST
CENTRALPERI M ETER
N. LAK E
F u l t o n
F o r s y t h
Cl a y t o n He n r y
P a u l d i n g
Do u g l a s
Co b b
Gwi n n e t t
Ro c k d a l e
I 75
I 75
I 75
I 675
Hwy 7 8
I 85U
S H
WY
19
I 2 8 5
I 20H w y 166
I 285I 8
5
I 20
Mi deastPaci f i c
Mount ai n West Nort h Cent ral
Nort heastEast Nort h Cent ral
Sout heastSout hwest
Atlanta: A Multi-nucleated Market
Real Estate Process
© JR DeLisle, Ph. D.Intra-urban Analysis
Where in the market?
Real Estate Process
© JR DeLisle, Ph. D.Geo-Spatial Analysis
• Market• Submarket• Trade Area• Neighborhood• Block
© JR DeLisle, Ph. D.Runstad Center for Real Estate Studies
Trade Areas: Redmond
photos courtesy of Aerolistphoto.com.
RedmondTown Center
Trade Area???
© JR DeLisle, Ph. D.Runstad Center for Real Estate Studies
Analytical Tools: GIS & Spatial Analysis
Seattle TigerZoomArea
Real Estate Process
© JR DeLisle, Ph. D.Analytical Tools: GIS & Spatial Analysis
Seattle TigerZoomArea
Real Estate Process
© JR DeLisle, Ph. D.Urban Form: Physical/Spatial Characteristics
• Magnitude/Concentrations– Size– Population density– Density variation in different parts
• Patterns– Locations of different land use– Locations based on ethnicity, income group and other
classifications of society
A steep urban form with a central focus of intense land use and value
A sprawled urban form with multiple focus points and more even land values.
Value
Real Estate Process
© JR DeLisle, Ph. D.The Real Estate Process: Money-Time
Real Estate Process
© JR DeLisle, Ph. D.Real Estate: The Foundation
Question: What are we buying when we buy real estate?
Bricks and mortar??????
Time
Vacancy & Expenses
= Net Operating Income (NOI)
PV $’s
Gross Rent
No… A set of assumptions……
Real Estate Process
© JR DeLisle, Ph. D.Frontdoor Model: Sequence
Land
Hard & Soft Costs
TRCm
TRCm
NIr
* Wcc
/ NIR
GIr
Real Estate Process
© JR DeLisle, Ph. D.Backdoor Model: Reverse Engineered
Land
Hard & Soft Costs
TRCj
TRCj
NIm
* Wcc
/ NIRGIm
Market
RCR
Real Estate Process
© JR DeLisle, Ph. D.Interdisciplinary Spectrum: A Life Cycle Approach
Time
$
Portfolio Mgmt.Asset Mgmt.LeasingTenant ImprovementsTenant RelationsProperty Mgmt.Accounting/ReportingEngineeringFinancial Mgmt.
Construction Mgmt.Quality ControlsProject Mgmt.Architectural OversightCost Mgmt.Construction FinancingInspectionsPre-leasingReleasesFinal Inspection
orSourcing if Existing
FeasibilityMarketabilityAppraisalEngineeringArchitecturalEnvironmentalLegalCost EstimationNegotiations
Hold/Sell AnalysisMarketingValuationBuyer SelectionBroker ManagementNegotiationsClosing
Planning Acquisition/Production
Operation
Disposition/Redevelop
Real Estate Process
© JR DeLisle, Ph. D.Development Finance Timeline
• Construction Loan• Interim Loan or Mini-perm• Permanent Loan
Construction Loan
Interim/Gap Loan
Permanent Loan
Repayment or Refinancing
Stabilization & Operation
Real Estate Process
© JR DeLisle, Ph. D.Decision-Making Process in Real Estate
• Awareness of need• Problem statement• Decision model• Identification of alternatives• Selection of solution• Implementation of decision• Monitoring and feedback
Real Estate Process
© JR DeLisle, Ph. D.Risk Management and Real Estate
• Risk Scenarios• Situation: Buying Property
• Case A. Predict rents rise to $30/sf; only hit $20.• Case B. Predict rents rise to $20/sf; actually, hit $30
• Which is Risk? A, B, A & B, None of above?• Definition of Risk
potential variation between expectations and realizations• Causes of Risk
– Inadequate information– Inaccurate data– Invalid predictive model– Unforeseen change in environment– Other externalities
Real Estate Process
© JR DeLisle, Ph. D.Lecture Review
• Course Overview
• The Real Estate Process
• The Nature of Value
• Decision-making in Real Estate
• Risk-Management