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