URBAN STRUCTURE, RENT THEORY AND LOCATION

Urban Structure and Dynamics

• Why Urban Structure?– Primary distinguishing attribute of real estate is

its fixed location– Physical and economic environment affects real

estate value– The key to successful real estate investment is

understanding urban growth patterns

Urban Areas

• The Need for Urban Areas– Savings in costs of social interaction– Internal economies of scale– External economies of scale– Labor specialization– Consumer choice

• Note: Urbanization has its cost

Urban Growth Models• Concentric Circle theory: Ernest Burgess

– Explains urban growth in terms of distance from "downtown"

– Five concentric circles

• "downtown": most intensively used, offices, retail, govt.

• Transition Zone: low income units, night clubs, manufacturing, slums

• Zone of worker homes: multifamily units

• Zone of middle and high income families

• Commuter zones: suburbs, exurbs

Urban Growth Models

• Direction of Least Resistance: Richard Hurd– Direct take-off of concentric model– Key twist: transportation arteries– Commuting time from "downtown" matters not dis

tance from "downtown"– Also has five zones but not concentric – Developments follow transportation corridors– Some natural FEATURES act as barriers to growth

Urban Growth Models• Sector Theory: Homer Hoyt

– Explains how residential concentrations develop around "downtown"

– Income, cultural factors, tastes and preferences influence where people locate

– Rise of ethnic neighborhoods– In this model low income households locate ne

ar "downtown"

Urban Growth Models

• Multiple Nuclei Theory: Harris and Ullman– Preceding three models assume one "downtow

n"– This model assumes neighborhood clusters crea

te mini "downtown"s in addition to major "downtown"

– Mini "downtown"s caused "downtown" to lose its position as the sole focal point with urban area

Rent Theory• Principles of Rent Theory:

– Rent is payment to real estate– Land use activities locate according to comparative

advantage– Rent paying ability determines where land use locate– Hierarchy of land uses develops according to level of

rents or prices– First choice: office buildings, retail, apartments – Land use activities concentrate at "downtown" with

gradual decline in intensity and value away from "downtown"

Model of Land Value or Rent• Urban land values (rent) and its tendency to

decline as one moves away from "downtown" can be explained in terms of savings in transportation cost

• Assumptions of model• City on a featureless plain

• production and distribution at "downtown"

• Homogeneous family

• Families live around "downtown"

• Cost of building and maintenance is constant

Rent Theory

• Proposition:– Total housing cost = building cost + maintenance cost

+ site rent

• Site rent = rent paid for a site less what it will command in an agricultural use– Question: What is the opportunity cost of urban

site?– Site rent component is what causes land values

to vary with location

Site Rent

Transportation Cost

A

F

B

O D

Housing Costexcluding site rent

EDistance

Annualtransport.cost atcity’s edge

Site Rent for Residential uses

"downtown"

Rent Theory

• Site Rent Analysis using diagram– Proposition: Site Rent at any point on urban

landscape is equal to transportation at the edge of city less transportation cost at that point

• At E site rent = AB - AB = 0

• At O site rent = AB - 0 = AB

• At D site rent = AB - AF = BF

A F

B DDistance

E

bid rent curve for households for sites

Annualsite rent A - E = Intensive

margin

extensivemargin

INTENSIVE AND EXTENSIVE MARGINS

LOCATION ANALYSIS

LOCATION, LOCATION, LOCATION

The three most important factors in real estate analysis

Meaning of Location

• Location: most important factor affecting real estate productivity and therefore value

• Approaches to location analysis– Transportation cost: weight gaining R.M. Haig– Accessibility/convenience: R. Ratcliff– Total Environment: R. Andrews

• Total environment in which a specific land use on a specific land parcel functions and interacts at a specific time

Factors in Location Analysis

• Points to consider – Nature of relationship between the site and othe

r points on land scape– Convenience/inconvenience of moving from sit

e to other places– Possibility of unpleasant experience– Possibility of pleasant experience

CONCEPTS OF LOCATIONS• Establishment:

– basic unit of land use: retail store, house ,church, apartment etc

• Packet of Function:– a land use serves a variety of functions

– Trace the packet of functions for a house

• Linkages:– relationships lead to movement and/or communication

• Cost of friction: time, stress and $ involved in communication or movement

TYPES OF LINKAGES

• Linked establishments locate near each other

• Types of linkages or relationships– Dominant use-ancillary use– Dominant use-subordinate use– Co-dominant uses & dominat use-satellite use

• Anchor tenants and sandwiched tenants

Land uses locate in clusters: Why?

• Agglomeration economics: tendency of land uses to locate in clusters for mutual benefit

• External Economies: benefits from locating in clusters

• Localization economies - firms belonging to same industry

• Urbanization economies - firms belonging to different industries

Detailed Factors in location analysis

• Transportation system: streets, sidewalks, bike lanes, mass transit, rail lines etc

• Utility systems: electricity, gas, cable, water, sewer, phone, cable TV

• Information technology: what ?

• Municipal services: police protection, fire protection, refuse collection, school system

Linkages/Location is Dynamic

• Changes in location needs– Changes in linked establishments: effects of TV and c

able TV– Changes in non-linked establishments: erection of lar

ge office building near subdivision– Changes in movement channels– Changes in nature of enterprise: family life cycle– Changes in technology: separability of functions, red

uce demand for office space

Fixed Location and Real Estate Market Characteristics

• Localized markets

• Heterogeneous product

• Diffused market分散的市場• Supply lag and demand lag

• Short selling is not possible: not fungible

• Private transaction

• Question: Are real estate markets efficient?

Supply and Demand Factors• Population: age, sex, family composition, hshld size• Income: per capita , aggregate, distribution• Employment/unemployment• Availability of mortgage and interest rate• Personal savings• Rent, vacancy levels and absorption rates• Real estate taxation• Construction technology• Cost of inputs