Real Estate Economics 156 Foldvary

Real Estate Development

Economic meaning of investment: an increase in the stock of capital goods and human capital.

One third of investment in capital goods is related to real estate.

Three divisions of real-estate construction:

residential, tied to interest rates. 60% of private construction.

            1/4 of new single family houses are mobile homes.

            Manufactured rather than traditional construction.

            Would be more if zoning allowed. Historical prejudice to trailer parks.

The price of new houses sets a ceiling on the price of existing housing.

            Old houses sell at a discount because of wear and tear and obsolescence.

nonresidential, tied to business cycles. 40%.

public works - government real estate, including infrastructure like streets and bridges.

            Also street architecture. Parks. Airports.

Real estate development (CA R.E. ecs, 9)

1)        Site identification. Zoning, possibly rezoned. Economic conditions.

            Market analysis, prices. Forecasts of demand. Population trends.

            Availability and feasability of assembling land.

            Forecast of land-value appreciation. Time needed for approval.

            Feasibility study: financing terms.

2) Land procurement. Often assemble land from several or many owners.

            Option agreement; Escrow instructions with contingencies.

            E.g. subject to rezoning, approvals, utilities.

            preparation of sites. Clearing and leveling.

            Hiring a subdivision engineer and architect.

            Subdividing. Building permits. Compliance with building codes.

            Environmental reports. Utility requirements. Streets.

            From 20-40 percent of the price of a new house is due to regulations.

            In California regulations are especially costly

            Includes litigation costs, especially for condominiums.

            Impact “fees”: taxes paid by developers to get around low real estate taxes.

3) financing. A project budget.

            Construction financing; borrowing and equity. Forming a partnership.

            The lender will examine titles, restrictions, easements, liens.

            1990s: growth of Real Estate Investment Trusts (REITs)

4) construction. Possibly the creation of a homeowners’ association.

            Hiring subcontractors, with credit checks and background investigations.

5) selling, often gradually.

            Built to suit, or on speculation.

6) property management. Homeowners assume control.

1980s: overbuilding.

Changes in income taxes. But mostly “easy money.”

Deposit insurance was raised from 40K to 100K in 1980.

Risky loans were made to developers.