Define: Real Estate Market Analysis

Hello again,

When explaining my profession to those outside of the commercial real estate industry, the most common responses tend to elicit the inevitable "mmm...hmmm" or "How interesting,...". Eyes dance nervously this way and that, scanning the horizon for familiar faces, searching for any excuse to jump ship gracefully.

It is either that the average person is disinterested in commercial real estate markets or it could be that the average person lacks the vocabulary necessary for basic communication in the commercial real estate field.

It is this second downfall that I wish to address in this post, but first let me direct you to those who have already accomplished this task, the good people at the CCIM Institute. A powerful demonstration of real estate terminology can be found here.

Below are a few definitions that I hope will help you break the ice at social events.

1. Vacancy Rate: Vacancy Rate = Vacant Space / Total Space

It is important to understand that a vacancy rate is not a bad thing. Commercial vacancy rates are analogous to the civilian unemployment rate, in that a "natural" vacancy rate is assumed to exist in all healthy markets and movement to the extremes of either above or below this rate are disastrous. An exceptionally low vacancy rate is harmful in that it raises the costs associated with finding new space for growing businesses and these high transaction costs can impose friction causing growing pains for firms in the area, as well as acting as a barrier for firms that wish to move into the market. A high vacancy rate is undesirable as well, since it means that available resources are underutilized.

The vacancy rate is of interest in that under normal circumstances it moves in the opposite direction as market rents. When the vacancy rate is above the natural rate, rates tend to fall and when the vacancy rate is below the natural rate, rents will tend to increase.

2. Market Rent: Quoted in dollars per foot leased per month. It is also common to quote rents in dollars per foot leased per year, a practice that is popular in markets outside of California.

There is a significant difference between asking rents and effective rents.

Asking rents are easier to obtain; it is the price quoted by brokers before a building is leased. They are the sticker (asking) price of the property as it is advertised.

Effective rents are harder to obtain; it is the price actually paid once concessions such as free rent and tenant improvements are figured into the equation. The effective rents are of much more interest since it involves private information and can vary dramatically from tenant to tenant.

In my experience, these are the two numbers that most people are interested in; How much space costs and how much space is available.

For those that are interested in these all too important numbers, I direct you to the most recent editions of the Colliers Market reports. Published by yours truly on a quarterly basis, this is a good start to understanding the basics of the Inland Empire.

Distribution Center Webcast

Hello, for more information about the web cast I mentioned yesterday, you should be able to access the entire web cast here. Again I wish to thank my friends and esteemed colleges at Logistics Management. I hope one day I can return the favor.

Warehouse Vs. Distribution Center

There was a lively PowerPoint slide show today by the good people at Logistics Management, based on research conducted by Reed Business Information and Gross & Associates. It can be found here, and I hope they don't mind all the free publicity I am pushing their way.

In a nutshell, they note the difference between a traditional warehouse (where stuff is stored until it is needed) with the more modern sounding distribution center (where stuff is brought together, repackaged and then sent back out into the world).

The differences between these two types of buildings are stark and almost discomforting. The traditional warehouse represents the old and familiar low ceiling metal building in the bad part of town next to the railroad tracks where strange and bizarre items sit and collect dust. The distribution center is a little more sinister in that it represents the way the world will be, an entire secret network of information and products floating in both directions, stocking shelves and ordering products as if by a giant invisible hand.

The old saw goes that the warehouse is transportation at zero miles per hour and indeed it used to be that warehouses were a necessary evil used as a buffer against those capricious whims of human nature: demand. Since the information chain between consumer and producer is a long and tangled one and since the supply chain between producer and consumer isn't perfectly responsive and isn't perfectly reliable, producers needed a way to store their product locally to weather out these storms of unknowns.

Warehouses were born as a way for firms to jump the hurdle of what economists like myself like to call "market inefficiencies", which is just reality getting in the way of our convenient theories. Two very significant hurdles basically created the need for a warehouse in the supply chain; imperfect/ incomplete information as well as transportation costs.

If demand for a firm's product were known in advance and products could be created as needed and delivered to the point of consumption instantaneously, then there would be no need for a warehouse and the world would ultimately be a better place. Unfortunately we live in the real world and not in the future.

As Just-In-Time practices (warehouse management software, RFID tags, demand forecasting) proliferate and the rest of the world wakes up to the Wal-Mart reality of a nimble global supply chain that can react and adapt to changing demand, then the world will be ready for the modern distribution center.

The distribution center is a behemoth to be feared, of a size and scale that is beyond a rational sense of proportion; from a couple of hundred of thousand square feet to well over a couple of million, and with a height of 20 to 40 feet these buildings serve as the only physical markings of a vast and mysterious supply chain that reaches into the lives of every consumer on the planet.

The days of the warehouse are not over, but their role in modern society has been greatly downgraded, much like the horse at the dawn of the automobile.

Sample Audio-Blog

This is my first Audio-Blog post created using Gabcast. I am still in the market for free audio software to post audio-blogs so this may or may not be a permanent feature. I am not sure how many bells and whistles to add, as there seems to be a fine line between absolutely necessary and completely distracting.

Sample Movie: Building Tour

This is a sample tour of a building in Ontario. I didn't create the SketchUp file (SketchUp is a program where you can build anything and import it directly into Google Earth). This building is the Ontario office of HMC Architects.

In order to import SketchUp files into Google Earth, files have to be downloaded into Google's 3-D warehouse, which stores SketchUp projects others have created which can be seen in Google Earth.

Sample Movie of Inland Empire

This movie was created in Google Earth (trial version for now) and shows the submarkets that have industrial and office properties that I track. The submarkets are based on city, and this shows the cities in Riverside County (shown in shades of blue) as well as those cities in San Bernardino County (shown in shades of red).

The audio was added later using Microsoft Windows Movie Maker.

Thomas Galvin - Author Profile

Hello, my name is Thomas Galvin. I have a master of arts degree in economics from the University of Nevada, Las Vegas and my thesis can be viewed here. I don't want to spoil the ending, but it includes an experiment where subjects play Rock-Paper-Scissors (which seems to be a popular sport among "famous" economists).

I also have a bachelor of science degree in psychology from California Polytechnic State University, San Luis Obispo. My thesis also involved Rock-Paper-Scissors.

I am a student of human behavior, especially in areas involving risk and uncertainty (and Rock-Paper-Scissors).

For the last three years I have been working in the commercial real estate field and recently I have been involved with industrial warehouses in the Inland Empire.

This is my blog which details the economic factors which relate to industrial and office development in the Inland Empire as well as the nation at large.