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The State of the Economy and Real Estate Markets - Development Ahead!
Joshua Harris, Ph. D., CAIA Director, Dr. P. Phillips Institute for Research and Education in Real Estate
First, an introduction to the Option Theory of Land
Land is an Option on Development
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Value of Real Property ◦ Highest and Best Use◦ Income and/or Economic Utility delivered◦ Option Component
Real Property Options◦ Option to Expand◦ Option to Reduce◦ Option to Change Use◦ Option to Delay
Total Value = Real Value + Option Value
Determinants of Option Value
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Classical Financial Options (i.e. Puts & Calls)◦ Volatility◦ Discounting Rates◦ Time Until Expiration◦ Dividends
Applied to Real Property◦ Volatility of Demand (Macroeconomics)◦ Volatility of Supply (Capital Markets/Const. Prices)◦ Volatility of Regulation
Bottom Line – Economy Determines Volatility
State of the Economy
Economy is Growing
Source: Bureau of Economic Analysis
People are Working
Source: Bureau of Labor Statistics
And they are Spending
Source: Census Bureau
Making Companies Rich!
Source: Bureau of Economic Analysis
We are buying more Things
Source: Bureau of Economic Analysis
But do need to make more?
Source: Census Bureau
We are building more
Source: Bureau of Economic Analysis
And bringing more onshore
Source: Census Bureau
And sending more offshore!
Source: Census Bureau
Wait, what about Interest Rates?
10-Year Treasury Bond Yields“Unbelievably low interest rates”Dividend Yield DJIA: 2.91%, 15 DJIA stocks yield >3%30 year result: Long-term Treasuries beat Equities
From October 2012 – 1.69%
10-Year Treasury Bond Yields“Still low interest rates”.
We now all KNOW they ARE RISING!!!
A Year Ago 2.67% - a 58% Jump
10-Year Treasury Bond Yields“Still low interest rates”.
YES, We STILL all KNOW they ARE RISING!!!
One Year Later 2.26% - a 15% DECLINE
What will impact Florida?
Baby Boomers will Move
Source: U.S. Census Bureau
Retirement Relocation – Major Driver
Leaders of Job Growth Growth of MSA >1 million, 2014 YTD
Source: U.S. Bureau of Labor Statistics, Forbes.com
# City Job Growth1 Orlando, Florida 3.7%2 Houston, Texas 3.5%3 Dallas, Texas 3.4%4 Miami, Florida 3.0%5 Portland, Oregon 2.9%
6 (tie) Denver, Colorado 2.8%6 (tie) Riverside, California 2.8%8 (tie) San Francisco, California 2.6%8 (tie) Seattle, Washington 2.6%
10 San Diego, California 2.4%
How Does Orlando Rank?
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Growth of MSA >1 million since 2000 (YE 12) # City Population Growth since 2000
1 Raleigh NC 1.2 47.80%2 Austin TX 1.8 44.90%3 Las Vegas NV 2.0 43.60%4 Orlando FL 2.2 34.20%5 Charlotte NC 2.3 32.80%6 Riverside-San Bernardino CA4.4 32.70%7 Phoenix AZ 4.3 32.10%8 Houston TX 6.2 31.00%9 San Antonio TX 2.2 29.90%
10 Dallas-Fort Worth TX 6.7 27.90%
Source: U.S. Census Bureau, Forbes.com
How Does Orlando Rank?
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Growth of MSA >1 million from 2011-2012
Source: U.S. Census Bureau, Forbes.com
# City Population Growth 2011-20121 Austin TX 1.8 3.00%2 Orlando FL 2.2 2.20%3 Raleigh NC 1.2 2.20%4 Houston TX 6.2 2.10%5 Dallas-Fort Worth TX 6.7 2.00%6 San Antonio TX 2.2 1.90%7 Phoenix AZ 4.3 1.80%9 Charlotte NC 2.3 1.70%
11 Las Vegas NV 2 1.70%23 Riverside-San Bernardino CA4.4 1.10%
Growing Economy = More Demand
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New construction occurring across the board
Banks are desperate to lend
Apartment Rental Rates & Home Prices rising
Commercial Real Estate Prices at or above prior peak
Risk of oversupply, still fairly low
Issues in Eminent Domain?
Highest and Best Use may change rapidly
Urban Markets are more desirable
Infrastructure DID NOT keep pace, or even close
Values are tricky, my sympathies to the Appraisers (….Option Values)
Results of a fast changing market
