Back to the city : differences in economic and investment performances between downtowns and suburbs
Differences in economic and investment performances between downtowns and suburbs
Massachusetts Institute of Technology. Center for Real Estate. Program in Real Estate Development.
William C. Wheaton.
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Recently, we have observed significant changes in which corporate offices and residential buildings have been relocated from the suburbs back into the city. Does the observation mean that there is a real economic movement back into the cities by firms or households? If there is any movement, how does this trend drive any changes in the commercial real estate properties? Does it significantly affect the performance of properties in the cities as opposed to the other areas? Does the performance of the properties in the city exert any influence on the investors who prefer commercial real estates in the US metropolitan areas? This thesis aims to provide answers to the major question on the "back to the city" movement and its influence on real estate markets. The answers are summarized as five major conclusions. First, the result of this study clearly points out that there is the "back to the city" movement although the change has happened only in the Urban Cores (UC) not the entire Metropolitan Statistical Area (MSA). Second, the economic performances between UC and MSA maintain a close link with each other. However, the volatility of the office net rental rate is much less in UC while the change in gross rental growth is almost same between UC and MSA. The UC rental growth of the multifamily is a little less volatile than the MSA growth. Third, the investment performances in MSA closely relates with the capitalization rate of UC. While the level of cap rates of UC offices is more volatile, the UC cap rate of apartments is more stable than the MSA rate. Fourth, the effects of population and employment on the real estate market enable the research to understand the current pricing behaviors. The difference in population and employment between UC and MSA explains the disparity in investment performances of the two areas. However, while the MSA rental growth explains the movements in the cap rate of MSA in accordance with the "rational" pricing, the effect of UC rental growth rates on the cap rate doesn't match with the pricing model, indicating that the rental growth rate of UC empirically leads to increases in the cap rate of the area. The nature of these outcomes offers that the UC market is not explicable by the "rational" pricing model. The result also indicates that the difference in rental growth rates reveals the positive relation with the gap in cap rates, which is complete opposite to the "rational" investors' behavior. Lastly, finding the differences in economic and investment performances between UC and MSA motivates to explore the determinants of the relationship. Although the study experiments the effects of manifold market characteristics, the explanatory variables used in the model do not fully explain the inequality between two specific markets. Thus, it is required to study further the determinants.
Thesis (S.M. in Real Estate Development)--Massachusetts Institute of Technology, Program in Real Estate Development in Conjunction with the Center for Real Estate, 2012.Cataloged from department-submitted PDF version of thesis. This electronic version was submitted and approved by the author's academic department as part of an electronic thesis pilot project. The certified thesis is available in the Institute Archives and Special Collections.Includes bibliographical references (p. 101-102).
DepartmentMassachusetts Institute of Technology. Center for Real Estate. Program in Real Estate Development.
Massachusetts Institute of Technology
Center for Real Estate. Program in Real Estate Development.