, COMMERCIAL
REALESTATE
ANALYSIS & INVESTMENTS
DAVID M. GELTNER NORMAN G. MILLER
Massachusetts Institute of Technology University of Cincinnati
JIM CLAYTON PIET EICHHOLTZ
University of Cincinnati Maastricht University
Pension Real Estate Association
, Commercial Real Estate Analysis and Investments, Second Edition
David M. Geltner, Norman G. Miller, Jim Clayton, Piet Eichholtz
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ISBN-13: 978-0-324-38214-3
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,This book is dedicated to our parents, our wives, and our children, and to all the students
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, Brief Contents
PART I INTRODUCTION TO REAL ESTATE ECONOMICS 1
1 Real Estate Space and Asset Markets 3
2 Real Estate System 21
PART II URBAN ECONOMICS AND REAL ESTATE MARKET ANALYSIS 37
3 Central Place Theory and the System of Cities 39
4 Inside the City I: Some Basic Urban Economics 59
5 Inside the City II: A Closer Look 79
6 Real Estate Market Analysis 103
PART III BASIC FINANCIAL ECONOMIC CONCEPTS AND TOOLS 121
7 Real Estate as an Investment: Some Background Information 123
8 Present Value Mathematics for Real Estate 149
9 Measuring Investment Performance: The Concept of Returns 173
PART IV REAL ESTATE VALUATION AND INVESTMENT ANALYSIS
AT THE MICRO-LEVEL 199
10 The Basic Idea: DCF and NPV 201
11 Nuts and Bolts for Real Estate Valuation: Cash Flow Proformas and Discount Rates 235
12 Advanced Micro-Level Valuation 263
PART V COMPLETING THE BASIC INVESTMENT ANALYSIS PICTURE 295
13 Use of Debt in Real Estate Investment: The Effect of Leverage 297
14 After-Tax Investment Analysis & Corporate Real Estate 319
15 Real Estate Investment Capital Structure 355
PART VI MORTGAGES FROM AN INVESTMENT PERSPECTIVE 385
16 Mortgage Basics I: An Introduction and Overview 387
17 Mortgage Basics II: Payments, Yields, and Values 407
18 Commercial Mortgage Analysis and Underwriting 439
19 Commercial Mortgage Economics and Investment 463
20 Commercial Mortgage-Backed Securities 489
v
,vi BRIEF CONTENTS
PART VII MACRO-LEVEL REAL ESTATE INVESTMENT ISSUES 521
21 Real Estate and Portfolio Theory: Strategic Investment Considerations 523
22 Equilibrium Asset Valuation and Real Estate’s Price of Risk in the Capital Market 561
23 Real Estate Investment Trusts (REITs) 585
24 International Real Estate Investment: Markets, Strategies, and Implementation 627
25 Data Challenges in Measuring Real Estate Periodic Returns 657
26 Real Estate Investment Management and Derivatives 689
PART VIII REAL ESTATE DEVELOPMENT AND OTHER
SELECTED TOPICS 727
27 Real Options and Land Value 729
28 Investment Analysis of Real Estate Development Projects: Overview & Background 757
29 Investment Analysis of Real Estate Development Projects, Part 2: Economic Analysis 779
30 Leases and Leasing Strategy 807
Answers to Selected Study Questions on CD
Index 831
CD-ROM
Answers to Selected Study Questions
Appendices and Additional Readings (for each of the 30 Chapters)
ARGUS Software (student version for completing selected exercises)
CRYSTAL BALL Software (student version for completing selected exercises)
, Contents
PREFACE xxi
ACKNOWLEDGMENTS xxvii
ABOUT THE AUTHORS xxix
PART I INTRODUCTION TO REAL ESTATE ECONOMICS 1
1 Real Estate Space and Asset Markets 3
1.1 Space Market 3
1.1.1 Segmentation of Space Markets: The Immobility of Real Estate 4
1.1.2 Supply, Demand, and Rent in the Space Market 5
1.1.3 Supply Is ‘‘Kinked’’ 6
1.1.4 Relation among Supply, Development Cost, and Rent 7
1.1.5 Forecasting the Future Direction of Rents 8
1.1.6 Is the Supply Function Rising, Level, or Falling? 9
1.2 Asset Market 11
1.2.1 Capital Markets 11
1.2.2 Pricing of Real Estate Assets 14
1.2.3 Is the Asset Market Segmented Like the Space Market? 15
1.2.4 Magnitude of Real Estate Assets in the Overall Capital Market 17
1.3 Chapter Summary 18
Key Terms 18
Study Questions 19
2 Real Estate System 21
2.1 Commercial Property Development Industry 21
2.2 Overview of the Real Estate System 22
2.3 Four-Quadrant Model 25
2.4 Using the 4Q Diagram to Help Understand Boom and Bust in Real Estate Markets 27
2.5 Chapter Summary 33
Key Terms 34
Study Questions 34
Part I References and Additional Reading 36
PART II URBAN ECONOMICS AND REAL ESTATE MARKET ANALYSIS 37
3 Central Place Theory and the System of Cities 39
3.1 Pattern of City Size 39
3.2 Pattern of City Location 41
3.3 Factors Underlying the Pattern: Centripetal and Centrifugal Forces 42
3.3.1 Centripetal Forces 43
3.3.2 Centrifugal Forces 44
3.3.3 Balance of Forces 45
vii
