Transcript Gebhardt Presentation

I GET AROUND: REAL
ESTATE, DEVELOPMENT
PLANS AND
TRANSPORTATION
Dr Matthew F Gebhardt
October 18, 2013
Housing Land Advocates Conference
Agenda



Supply and Demand and Housing Markets
Assessment of Risk and Decision to Develop
Portland’s Rental Market
Supply and Demand
Supply
Price
S2
Decrease
O
S0
S1
Increase
Quantity
Demand
Price
D2
D0
Decrease
O
D1
Increase
Quantity
Supply and Demand
Price
S1
i
Pe2
Pe3
Pe1
S2
j
g
h
D2
D1
O
Qe1
Qe2 Q
e3
Quantity
Elasticity of Supply
P
D0
P
D1
D1
Pe2
S0
Pe2
Pe1
O
D0
S0
Pe1
Qe1
Qe2
Q
O
Qe1Qe2
Q
Function of Housing Markets

Demand for housing depends on a wide variety of
factors

Demand is determined by income, availability of
substitutes and availability of complementary
goods, rate of household formation, rate of
mortgage interest, current housing price

Major factor in increased demand in Portland
Metro Area is due to population growth, primarily
from migration
Function of Housing Markets

Demand for housing is also extremely complex
and fragmented

Big or small, near schools or near work, in
Portland or Beaverton, buy or rent, old or new

Or maybe it’s simple: location, location, location
Bid-Rent
Rent/Price
Distance from Center
Function of Housing Markets

Supply is also based on a wide variety of factors
Price levels in the recent past (1-2 year lag)
 Interest rates
 Land available for housing with proper zoning
 Construction costs


Speculative housing construction can have an
effect
Function of Housing Markets

Housing markets do not function efficiently
 Imperfect information
 High
search and transaction costs
 Stock variation

Tend to be highly localized
 Many

submarkets
Prone to fluctuations
Assessment of Risk
Net Operating Income/Costs
Net Operating Income
Income after normal operating expenses have
been deducted, but before non-operating
expenses and debt service.
Calculation:
Potential Gross Income
- Vacancy and Concession Allowance
Effective Gross Income
- Operating Expenses
Net Operating Income
Gross Operating Income
Vacancy Factor (5%)
Rent Concessions (0.5%)
Effective Gross Income (EGI)
Real Estate Taxes
Insurance
Advertising
Management
Building Maintenance/Repairs
Landscape Maintenance
Turning Expenses
Garbage
Utilities
Sewer/Water
Reserves
Total Operating Expense
Net Operating Income (NOI)
250,000
-12,500
-1,250
236,250
7,500
5,000
1,000
10,000
20,000
5,000
12,500
5,000
20,000
15,000
2,500
-103,500
132,750
Construction Cost Estimates




 Legal
fees
 Accounting costs
 Inspection costs
 Overhead/administration
 Insurance
 Taxes
 Consultants
Land
Site preparation
Infrastructure
Hard Costs
 Labor
 Materials

Soft Costs
 Marketing
 Operating


Contingencies
Development fees
Develop or Not?

Comparison of expected NOI from the property
to the cost of developing the property

If expected NOI is too low or costs are too high
the perceived risk of the project may be deemed
too great to proceed

Even if developer is willing to accept a lower
return
Construction Costs
($
s)
Net
Op.
Inc.
Develop or Not?

Lower rents (lower NOI) or higher costs can
make risk of undertaking development greater

Equation can be changed through increasing
NOI through:
 More
total units (higher densities – although this
increases costs)
 Mixing or changing the mix of units (more market
rate)
 Subsidizing rents
Develop or Not?

It can also be changed by lowering costs
including:
 Soft costs
(design, entitlements)
 Finance costs (interest rates, more equity)
 Labor costs (non-union labor)
 Land costs (discounted land)
 Material costs (lower level finishes, smaller units)

Of course, perception also plays a part
Portland Market
In Brief
Housing Affordability

Affordability
 Defined
as ability or inability to gain access to
housing at market prices

Regional Variation
 What
constitutes affordable housing in Portland is
quite different than what constitutes affordable
housing in San Francisco

Two approaches to measuring affordability:
ratios and residuals
Measuring Affordability

The ratio compares housing costs (prices, rents or
mortgage payments) against income (wages,
benefits, etc)
 It
is often suggested 30-40% of household income can
reasonably be spent on housing

The residual looks at disposable income after the
cost of a decent home have been deducted
 This suggests
that there is an absolute minimum
disposable income required to sustain an acceptable
quality of life; it is linked to poverty line estimates
Portland Area Affordability
Portland Metro
Owner Occupied Housing Costs
$1,471 $1,461
Renter Housing Costs
$905
$934
% > 30%
Portland Metro
All Households 40.20% 37.90%
Renters
50.30% 49.40%
Source: 2012 ACS
Portland Area Affordability
5% = Full Occupancy
Portland Metro Vacancy Rates
4
3.5
3
2.5
2
1.5
1
0.5
0
1Q 12
2Q 12
3Q 12
4Q 12
1Q 13
2Q 13
3Q 13
Source: Norris, Beggs and Simpson
Trade-Offs

Possible to trade off housing costs and other
costs, especially transportation costs

Pay more than 30-40% for housing but walk, bike
or take transit to work

Not always simple to make that trade off and
more difficult with rising transit costs and service
reductions
Thank You for Listening!
Questions? Answers?