Multi-Dimensional Nature of Real Estate - Dr. James R. DeLisle

Part I: Behavioral Science of Real Estate
Chapter 3: Multi-Dimensional
Nature of Real Estate
Overview: Fundamentals of Real Estate
This is the
reorganized Fundamentals of Real
Estate. The book is organized into four major
categories: the discipline, space-time, moneytime,
and ownership, investment &
management.
Chapter 1: : Critical Thinking 1-29
Chapter 2: : Behavioral Real Estate 30-66
Chapter 3-4 Merged: Interdisciplinary Field
of Real Estate 67-96
(NOTE: Chapter 3-4 merged on 7/30/2010)
© JR DeLisle, PhD
i

Multi-Dimensional Nature of Real Estate
Table of Contents
The Nature of Real Estate ......................................................................................................................... 68
Space-Time, Money-Time Nature ............................................................................................................ 68
Space-Time, Money-Time Nature of Real Estate ......................................................................................... 68
Definition of Real Estate ........................................................................................................................... 68
Spatial Elements of Real Estate .................................................................................................................... 68
Space-Time Elements ............................................................................................................................... 68
Money-Time Elements .......................................................................................................................... 69
Residential vs. Commercial Land Use .......................................................................................................... 69
....................................................................................................................................................................... 70
Implications of ST/MT Dimensions ...................................................................................................... 71
Space-Time/Money-Time Disconnect .......................................................................................................... 71
Space-Time/Money-Time Reconnect ........................................................................................................... 71
Lessons Learned: Importance of ST/MT to Spatial and Money Players .............................................. 72
CMBS Delinquency Rates ............................................................................................................................ 72
CMBS Issuance Activity ............................................................................................................................... 72
Market Monitoring: The Money-Time Side ......................................................................................... 73
The Money-Time Perspective ....................................................................................................................... 73
Market Monitoring: The Spatial Side ................................................................................................... 74
Space-Time Perspective ................................................................................................................................ 74
The Three Factor Spatial Model ........................................................................................................... 75
The Full Dimensionality of Real Estate ........................................................................................................ 75
Static Attributes ............................................................................................................................................ 76
Neighborhood Attributes ............................................................................................................................... 77
Submarkets and Trade Area Delineation ...................................................................................................... 78
Linkages and Connectivity ............................................................................................................................ 79
The Asset Class Debate ............................................................................................................................. 80
Is Real Estate an Asset Class? ....................................................................................................................... 80
Background ........................................................................................................................................... 80
Criteria for Asset Class ......................................................................................................................... 80
Unique Assets and Unique Market Mechanism ............................................................................................ 81
Meaningfully Different & Significant Asset Class ....................................................................................... 83
ii

Part I: Behavioral Science of Real Estate
Chapter 3: Multi-Dimensional Nature of Real Estate
Size of the Pie ............................................................................................................................................... 84
Interdisciplinary Nature of Real Estate Asset Class .................................................................................. 85
Interdisciplinary Nature of Real Estate ................................................................................................. 85
Interdisciplinary Spectrum: A Life Cycle Approach .................................................................................... 85
Summary Chapter 3 .................................................................................................................................. 95
Section 3: Next Chapter ................................................................................ Error! Bookmark not defined.
© JR DeLisle, PhD
iii

Preview
Chapter 3
Overview
This chapter explores
the multi‐
real estate. It
begins with a discussion of the Space‐
Time, Money‐Time components of real
estate and the implications on
dimensional nature of
participants in the market. It
introduces a formal definition of the
real estate product construct including
static attributes, environmental
attributes and linkage
attributes.
The discussion revisits the classic “Is
real estate an asset class?” debate. It
presents an argument that supportss its
treatment as an asset
class based on its
uniqueness, meaningfulness and
significance. It discusses the
implications of this treatment on the
industry. The chapter
then explores
the
various
areas of specialization in real
estate and real estate‐related fields.
This discussion is organized around the
product life cycle including
planning/production,
acquisition,
operation and disposition. It concludes
that real estate is a distinct asset class
and an inherently interdisciplinary field
of study.
Chapter3: Multi-Dimensional
Nature of Real Estate
What you will learn in Chapter 3
The Space‐Time, Money Time
components of real estate.
The importancee of market monitoring of both the spatial and
capital sides off the industry.
A formal definition of the real estate product including static,
environmental
and linkage attributes.
The importancee of considering the full dimensionality of real
estate.
The vulnerability of real estate to externalities.
The tests of an asset class and the implications of such a treatment.
The unique nature of real estate.
The meaningful elements of the asset class.
The significance of real estatee
A life cycle approach to real estate
The key participants in the real estate process over its life
cycle.
Key Contructs
© JR DeLisle, PhD
67

Multi-Dimensional
Nature of Real Estate
The Nature of Real Estate
The late James A. Graaskamp noted the first “real estator” was a caveman. He created the first real estate
by rolling a rock in front of his cave to: 1) shield him from
the harsh elements, and 2) provide a space in
which he could defend himself against attack. In effect, he created defensible space which was delineated
by the size of the rock and the depth of the cave. No doubt, he soon began to carve out niches and
dig out
more dirt to make the raw cave more to his own liking. When the cavewoman joined
him, the world
of “customized real estate solutions” was born. Over time, the caveman
was forced to defend his turf against thee elements and
invaders – both animal and
human – so it became important that he stake out his turf and set boundaries which
would put others on notice.
Space-Time, Money-Time Nature
Space‐Time,
Money‐Timee Nature of Real Estate
Exhibit 3-1 presentss a stylized version of
Money‐time
the Space-Time, Money-Time dual nature
of real estate. The circular arrows refer to
the three distinct constituencies involved
in real estate: Space-Users, Space-
Space‐time
Producers, and Infrastructure
Providers/Facilitators. Each of these constituencies depends on
Exhibit 3- 1
both the spatial and capital sides of the equation when dealing
with real estate. This definition notes the fact that real estate has two elements: a spatial one referred to as
the “Space-time” element, and a temporal one
referred to as the “Money-time” element.
Definition of Real Estate
On the
surface, it might appear that a formal definition of real estate would be ratherr trivial; a piece of
property, a plat of dirt, a homestead, a house. In reality the real estate product construct is more
complicated than that since it is not just the dirt that has value, but the rights that it bestows over time. In
something of a poetic sense, real estate can be
defined as
“Artificially delineated space over time with a
fixed reference point to the earth.”
Spatial Elements of
Real Estate
Space-Time Elements
The spatial dimension of real estate is to synthesis of the
elements that distinguish as an asset. The specific
elements and the roles they play include:
Over Time
Artificially
Delineated
Space
Fixed
Reference
Point
Real Estate
68

Chapter3: Multi-Dimensional
Nature of Real Estate
Artificially Delineated. The “artificially
delineated” refers to the fact that real estate ownership
entails control over a finite parcel of real
estate for which the boundaries are clearly established.
These boundaries define the
geographic scope or areaa of which it is
Exhibit 3- 2
comprised.
Over Time. The “over time” element refers to the fact that while the physical space may live
forever
–subject to events of epic proportions—control or ownership of that space lasts for a much more
finite time. Initially, the period of ownership of the cave was coterminous with the period of
time the
caveman was healthy and strong enough to defend it. Over time, when social and political systems
were created, this period was extended beyond the life
of the owner through the
ability to pass on
ownership rights to successors or designees, includingg third-party buyers.
Fixed Reference Point. The “fixed reference” point is designed to
provide a spatial anchor or
reference point
to the earth. Since each property has a unique location, it can be
unambiguously
defined to allow the owner to stake claim
to the property, and to transfer or pledge rights to other
parties.
Money-Time Elements
The money side of the equation relates to the capital-intensive nature off real estate, as well as to the
economic mobility of money. On
the capital-intensive sidee of the equation is the fact
that real estate assets
are expensive on both per unit and per project
bases. For example, a 3,500 square foot house may
cost
$100/SF which translates to $350,000 total cost. When landd costs of $150,000 are added, the acquisition
cost could be around $500,000 or so depending on the market. If the same 3,500 building was an upscale
office building, the cost/SF may be $200 for a $750,000 total cost. Since commercial
uses might support a
higher land cost of $300,000, the
total commercial cost could be $1,000,000.
Residential vs. Commercial Land Use
While these costs might seem
reasonable, the fact is that in
most transactions, the full
amount must be given to the
seller before they will release
their claim on the asset. As
such, real estate is capital
intensive. Since few
buyers
have an
extra $500, 000-
$1,000,000 sitting around,
most would seek a mortgage to
purchase the property. This
introduces the “temporal
dimension” to the problem
since the mortgage must be
paid off over time. Without
Residential Use
Building
Size: 3,500sf
Cost/sf:
$100
Building
Cost: $350,000
Land Cost: $150,000
Total Cost: $500,000
Commercial Use
Building Size: 3,500sf
Cost/sf: $200
Building Cost: $700,000
Land Cost: $300,0000
Total Cost: $1,000,000
Exhibit 3- 3
gettingg into detailedd financial analysis at this stage, a simple example may put this money-time part of the
equation into perspective. In general, borrowers who use leverage may take out a mortgage for 80% or so
of the cost. In orderr to support that loan, the lender “underwrites the deal” looking at
whether the property
is worth the cost, and whether the borrower has the incomee potential (i.e., ability to pay) and the will to
© JR DeLisle, PhD
69

Multi-Dimensional Nature of Real Estate
pay (e.g., credit scores, prior loan repayment history) over time. Thus use of debt helps with the acquisition
and transfer, but now shifts the problem to a repayment one where the lender must be compensated for
advancing the funds. The lender typically charges some market-based interest rate and the borrower pays
that rate plus part of the principal or loan balance each month. The amount of that loan is a function of the
rate and the term over which the principal is repaid (this is known as
amortization and will be explained later).
One might argue that the money-time part goes away if the buyer
merely spends their own money and doesn’t have to worry about
repaying a mortgage. The reality is the money-time dimension is
ever present even though it may not be explicitly considered in
decision-making. That is, if the buyer puts up the full equity of
$500,000 for the house or $1,000,000 for the commercial property,
there is still a money-time element that should be considered.
Namely, the buyer could have invested the money in some other
asset and earned money on that investment. Thus, the decision to use cash is an implicit decision to forego
earnings on other alternatives. For example, if the buyer could earn 5% in a venture with about the same
risk as the property, the residential buyer would be giving up $25,000/ year (i.e., $500,000 * 5%) while the
commercial buyer would be giving up $50,000/year. So, in effect, whether a property is purchased for allcash
or all-debt, the transaction has a temporal, capital dimension.
Illustration of Money‐Time Dimension of Real Estate
The money‐time component comes into play again at the time denoted Value T2. This date could represent the
sale of the property or negotiation of a new lease. Once again, the Value * Rate = Income equation holds but the
income is now the income to support the T2 price (or the P2 income to yield the Rate). If the property sells for
more at T2, the next buyer must be willing to put up more capital, or take out a higher loan. At this point, the
mathematical analysis that went into the first transaction is
Value T3 repeated. This is an
important element of the Money‐
Time equation; the
ability to obtain Value T2 as Value T1
Value T2
an exit
strategy for the initial buyer
Exhibit 3- 4 only
Value = Income
works if the Income increases or
* Rate
meets
Rate
the P2 requirements.. The same
is true
at the time Value T3 is
Income
Value =Rate
assessed,
signifying that Value * Rate = Income
the
money‐time
Income Time P‐3
Income Time P‐1 Income Time P‐2
dimension is
always
present with real
estate
ownership or
control of rights.
Cost T1‐1
Cost T2
Cost T3
Cost T1
The reality is the
money-time
dimension is ever
present even though
it may not be
explicitly considered
in decision-making.
Commentary 3- 1
The Money‐Time Dimensions of Real Estate are illustrated in Exhibit 3‐3. The numbers will be discussed later but
it’s useful to approach the topic from a conceptual level at this point. The x‐axis is time and the y‐axis is money or
value. During the period up to T1, the project is being developed as noted in the Cost T1‐T1 in red. Once the
project is completed, it moves into the revenue generating phase which is T1‐T2. In order to justify the T1
investment, the project must generate P‐1 Income (V T1 * Rate). During this period the owner or tenant enjoys
the space‐time component but must satisfy the money‐time requirements.
70

Chapter3: Multi-Dimensional
Nature of Real Estate
Implications of ST/MT Dimensions
Recognition of the dual Space-Time and Money-Time scope of real estate has a number of important
implications. In particular, it dictates that real estate professionals must have an eye on both elements, with
special
attention to the degree to which they are integrated or aligned. For example, the recent collapse of
the commercial real
estate market was based in part on the failure to remember “lessons learned” from the
past. Unfortunately,
the real estate industry seems to have a short memory span which is due in large part
to the absence of critical thinking
and the tendency to “go with the flow.”
Example of Spatial/Capital Disconnect/Reconnect
Space‐Time/Money‐Time Disconnect
Exhibit 3‐5 presents a visualization of the real
estate cycle and the recent disconnect
between the spatial and capital sides. Over
the long term, real estate values are driven
70‐80% or so by market fundamentals and the
other 20‐30% or so
are driven by capital
markets. This proportion changes over time,
as in the latter part
of the decadee of the 2000s
when
capital markets became disconnected
from
real estate fundamentals. During this
phase, the infusionn of excess capital with little
consideration for real estate fundamentals
created a feeding frenzy where buyers were
chasing deals thus bidding prices up to
unsustainable levels. As a result of the
Exhibit 3- 6
disconnect, which was some 10 years in the
making, the commercial real estate market collapsed in an unprecedented confluence of seemingly independent,
but related, events.
Space‐Time/Money‐Time Reconnect
Once it was clear the easy, cheap,
plentiful credit days had played out,
the capital markets pulled back,
dropping values some 20%. Then,
investors began to think about risk
again, driving cap rates up and values
down. Finally, the economic recession
hit real estate,
driving vacancy rates
up and rents down. At that point, the
house of cards
had collapsed, leaving
many owners under water and
creating an unprecedented surge in
distressed assets. How it all plays out
remains to be seen, but the costs have
Exhibit 3- 5 been huge for
those caught standing
when the music stopped. While some
argued it was better this time than in
the 80s which was due to overbuilding, overpaying corrected faster and harder.
© JR DeLisle, PhD
71

Multi-Dimensional
Nature of Real Estate
Lessons Learned:
Importance
of ST/MT to Spatial and Money Players
The ST/MT dimensionality of real estate argues that all parties should
be aware of the full spectrum and
not be lulled
into focusing on their
particular niche. This point can be demonstrated by lookingg at: 1) the
importance of a developer understanding capital sources, 2) the
importance of capital understanding developers and spatiall markets,
and 3) all parties understanding the “dirt beneath the deal.” ” Assume the
case of
a local developer who is content to focus on spatiall market
fundamentals in their local market, relying on
market strength and
experience to manage risk. While
that may make sense andd allow the
developer to do what they do well, either they
or members of their
extended team of professionals must pay attention to the economy and
capital
markets.
… The failure of
developers to
monitor capital
markets can add
unnecessary risk as
in the recent
downturn were many
developers were
stuck with projects
The failure to monitor such activity can add unnecessary risk as in the
recent downturn were many developers were stuck with projects that that cannot be sold
cannot
be sold or financed since capital has flowed away from real or financed since
estate. In cases where they must be sold, developers have been facing a
steep discount which has translated to the record levels of distressed
capital has flowed
assets. While many developers relied on consultants or others for such away from real
monitoring and advice, it is important to recognize that these parties
earn fees whether or
not a deal works. That is not the case with
estate.
developers and will be even more important when recoursee debt re-enters the picture
in the aftermath of
the current debacle. On the other
hand, a locall developer who didn’t track capital flows may have sold
projects up to the peak of the market at higher
cap rates than necessary, only to fuel excess profits
for
flippers who were better at playing the option game.
CMBS Delinquency Rates
The case of the danger of investors and capital sources
eschewing real estate fundamentals is relatively easy to
demonstrate; one only has to point to the collapse of
the CMBS market. As noted in Exhibit 3-7, CMBS
delinquency rates dramatically increased after
2008.
Indeed, in mid-20100 delinquency
rates on some
issuances were pushing double digit levels.
Exhibit 3- 7
CMBS Issuance Activity
This was a dramatic
shock to many investors who saw
securitized investment as a safe way to capture superior
risk-adjusted cash flow returns as well as safety of
principle by relying
on the underlying collateral value to
bail them out in case of defaults. The end result of this
“lesson
learned” was an almost complete shutdown of the
CMBS
industry which has created a shortage of capital
and has contributed to the collapse of the commercial
market. Unfortunately, there is no easy solution to the
shortage of debt capital going forward.
72
Exhibit 3- 8

Chapter3: Multi-Dimensional Nature of Real Estate
Market Monitoring: The Money-Time Side
The Money‐Time Perspective
The dependence of real estate on the economy and capital
markets adds another dimension to the interdisciplinary nature of
the asset class. That is, not only is it important to understand the
wide array of professionals that are directly engaged in the
industry, attention must also be placed on the bigger picture
which sets the context or environment within which the industry
operates. While not arguing that all real estate professionals
should become economists or financial wizards, this
interdependence suggest that key economic, capital market
indicators should be considered in making real estate decisions. The
relevance of these indicators will vary by property type and location.
The Money-Time Perspective
© JR DeLisle, Ph.D.
Exhibit 3- 9
Money‐Time Market Monitoring
Macro‐economic Markets. The convergence between real estate and other markets that has occurred over
the past decade has placed added emphasis on the importance of reviewing the macro‐economic
environment that forms the backdrop against which individual real estate decisions must be made. As such,
it is important to explore the overall macro‐economic environment, paying special attention to the elements
that affect the demand/supply balance, both for the spatial asset and the investment it represents.
Economic Environment. Due to the capital intensive nature of real estate and the durable nature of most
real estate conditions, it is important to monitor the general condition of the overall economy. This
monitoring should address the current situation, as well as the economic outlook that will likely prevail
during the overall product life cycle.
Economic Indicators. This market tracking should provide a brief overview of the macro‐economic situation,
addressing such factors as GDP growth, inflation, interest rates, employment, stock market performance and
other variables that provide insight into the overall economic climate within which individual real estate
decisions must be made.
Economic Outlook. In addition to profiling the current economic environment, it is important to take a
longitudinal perspective, covering the past, the current situation and expected future conditions. The
importance of timing and the appropriate temporal frame that should be embraced will depend on the
proposed use and market cycles that will affect usage decisions over the planning horizon.
Capital Markets. Since real estate must compete with other asset classes for capital, it is important to review
the general market conditions that provide the competitive setting in which project or site‐specific decisions
must be based. Of particular note are the expected returns from various asset classes, costs of capital for
various ventures, and capital flows.
Overall Market Conditions. Since the real estate asset class competes for capital with other asset classes, it is
important to monitor trends that are occurring in the broader capital market. These trends cover a variety of
factors ranging from relative attractiveness of real estate versus other asset classes, to the yield
requirements necessary to remain competitive and attract sufficient capital to maintain market balance.
Trends and Cycles. In addition to capital flows, the exploration of the broader capital markets should reflect
the general trends and cyclical swings that can provide insights into the rationale underlying relative capital
flows. This insight will be particularly important in evaluating the "durability" or stickiness of capital
allocations to real estate versus other asset classes. This insight should help analysts quantify the future
demand for real estate as the capital markets return to a more traditional or balanced state.
Emphasis on Implications. To avoid the tendency to get overwhelmed with interesting materials that are
merely “noise,” attention should be focused on the implications of the capital markets on the specific real
estate activities or decisions at hand.
© JR DeLisle, PhD
73

Multi-Dimensional
Nature of Real Estate
Market Monitoring: The Spatial Side
Space‐Time Perspective
Some traditionalists
s argue that estate has
been characterized fundamentally
as a
"local"" market. As such, they contend that
one can
be successful by concentrating
their attention on a specific market without
paying
attention to externalities or macro
factors
that affect the broader national and
regional markets. Despite the appeal of
this approach, the emergence of the public
markets and the globalization of the
economy and capital flows --both
in
general and with respect to real estate-- has
made it increasingly
evident thatt focusing
attention on the local market alone is no
longer valid. That is not to suggest that
Exhibit 3- 10
local market insight
and presencee is not
critical, but that such a narrow focus is too myopic and will expose an investor or developer to the
risk of
wipeouts when the fundamental nature of the market changes.
Real Estate Capital Market Monitoring. Given thee cyclical nature of the real estate market and the
associated ebbb and flow of
capital to the
asset class, a continuous monitoring of the demandd for real
estate investments should be maintained, with emphasis on emerging trends. This will help evaluate
the relative returns and access to capital
by property type. This iss particularly important for
investments in
properties that have narrower appeal and/or capitall access and hurdle rates that differ
from those of
the broader "commercial"
" market. These differences may be found by property type
(e.g., hotel, special use), scale and product positioning.
Property Type Emergingg Trends. Despite the highh degree of diversity within
the major property
types, the overall market structure and demand is often subject to a number of macro-trends
that
affect the broader sector. These macro trends and national forces can also ripple down to individual
markets and property sub-types and thus may be relevant to a local study. This is particularly true
where the tenancy is likely
to be national or regionall in scope, or where capital
sources willl be
drawn from outside the immediate market area. In analyzing thesee trends, the analyst should
focus
on the major structural changes that are occurring, rather than shorter term cyclical changes. In many
cases, it will be difficult to
distinguish between the two sources creating a situation in whichh the
outcomes and
consequences must be tempered by probability assessments thatt quantify the
likelihood they will emerge.
74

Chapter3: Multi-Dimensional
Nature of Real Estate
The Three Factor
Spatial Model
The
Full Dimensionality of Real Estate
Overview
While the term “real estate” may
seem
fairly clear and logical, in reality
it is a
complex concept that entails a wide
variety
of attributes. Unfortunately, there
is no definitive source that unambiguously
establishes what is included in the spatial
dimension of the asset, resulting in a
potential long and inconsistent list of
spatial elements. While the scope
of
detailed items included in the real estate
product construct can vary depending on
the question at hand, three major
attribute
categories must be included: Static,
Environmental and Linkages.
Exhibit 3- 11
Static Attributes
The static attributes
of a site thatt are comprised of key physical elements that can have a material impact
on the potential uses and value of a property.
Site Attributes
Site Attributes. With respect to the site itself they include such natural items as size, shape,
topography, soils, water-table and vegetation. They can also include manmade attributes such as
streets, land coverage, utilities and open space.
Size, Shape and Frontage.
In many cases, the physical dimensions of a site will have a significant
impact on the optimal use decision, especially where the site has characteristics
that differ from those
of
the broader market. Thus, it is important to quantify
the site in a manner that allows it to be
compared to other sites thatt are similar in
scope and physical layout
Soil Conditions and Permeability. The type and condition of the underlying soils should be
considered in the use decision. This type
of analysis iss often deferred to other experts, and may be set
aside until the due diligencee or underwriting period off the project. The importance of soils will
depend on the intensity of the development proposal, as well as the
other natural features of the site.
Topography.
The topographical features
of a site cann have a number of strategic and tactical impacts
on
the optimal use decision and should be carefully considered in acquisition and usage decisions.
Drainage and Water Runoff. The impact of various developmentt patterns on drainage and run-off
will trigger heated debates. Such concerns should be approached with a cautious, disciplinedd eye. In
some cases, storm water drainage and the
need for retention pondss may have a significant impact on
the optimal use
decision, especially in terms of the maximum scale
of development
Environmenta
al Conditions/Resources.
In the current state of heightened awareness of global
warming and ecological impacts of land use, natural resources thatt are on site, or environmental
© JR DeLisle, PhD
75

Multi-Dimensional
Nature of Real Estate
impacts of uses of particular sites can create significant concerns that translate to regulatory policies
and practices that are designed to protectt scarce, material resources.
Utilities. In most urban areas, it is generally assumed that utilities will be a fungible commodity,
having little impact on optimal use decisions. In reality however, the different needs for basic utilities
and services by
property type and sub-type can have a significant impact on the
types of usess and
users that can be adequately
served on a given site.
Static Attributes
Building Attributes
If theree is an existing
building or buildings on
a site, the improvements
should
be profiled. The
relativee "positioning" of
existing assets in terms
of their
generic versus
customized profile will
be of particular
importance to
competitive
marketability and
potential re-use or
repurposing options.
Exhibit 3- 12
With respect to the
structures, static attributes include the design, materials, scale, features, quality and other items that define
a building or structure. In addition to providing a quantitative assessment of existing improvements, the
analysis should also
point out their general condition and current use. This discussion
should also review
the parking, landscaping, outbuildings and other improvements to the site that are noteworthy. In
addition,
the analysis of structure should address:
Size and Shape. In most assignments, the size and shape of existing improvements and site
allocations for building, parking and open space should be noted.
Materials and
Quality. By
definition, the bricks and d mortar elements of real estate represent an
eroding asset, as time and changing market forces cann have a material impact on
the relative
positioning of various improvements.
Condition and
Effective Age. Property management t and maintenance programs can be used
to
differentiate among investments, with a high correlation between deferred and preventive
maintenance and operating costs. Thus, the current condition of existing buildings is often a key
76

Chapter3: Multi-Dimensional
Nature of Real Estate
consideration in the determination of whether they cann be renovated or rehabbed, or whether
they
merely need to
be replaced to serve the current market.
Parking and Site Plan. Other factors of interest will bee parking indices, on-site traffic circulation, and
ingress-egress
points.
Environmental/Neighborhood Attributes
In the context of real estate with its "fixed location," there are a numberr of distinct, but related, geographic
definitions that are used in assessing the market context within which a particular site
is situated. One of
the critical decisions that must be
made in assessing the environmental/neighborhood
attributes of
a site is
the delineation or specification of the relevant
neighborhood and/or submarket area. The delineation of
such areas will depend on a number of factors
ranging from
legal and physical boundaries, to roads and
highways and governmental boundaries. In addition to being influenced
by the particular site and its
general orientation and logistics, delineation of appropriatee geographic areas of interest will depend on
general practices and perceptions
held in the local market.
Neighborhood Attributes
Neighborhood Delineation
In general, the neighborhood for a
site is defined as the
geographic
area that comprises the immediate
environmental context within
which the side is located. These
neighborhoods are rather narrowly
defined, focusing on
proximity
and a sense of identity. Factors
that affect neighborhood
designations include
Land Use. The type of land
use, the intensity of use, the
quality of construction, the
level of maintenance and
other physical descriptors that can be observed.
Demographi
cs. With respect to demographics, thee criteria are
somewhat less visible, but cover
similar concepts including
standard demographic elements of age, income, educational attainment,
household size and composition and ethnicity.
Connections/
/Identity. In addition to uses and users, neighborhoods are also delineated on
the bases
of connections, both physical in terms of roads and sidewalks, but also perceptual in terms of having
a sense of identity, of some overriding aura that envelops the area. In some communities (e.g.,
Seattle) neighborhoods are formally defined areass that are somewhat broader than a traditional
neighborhood
d, but have sufficient scale
and homogeneity to create a common area for purposes of
community outreach and representation.
© JR DeLisle, PhD
77

Multi-Dimensional
Nature of Real Estate
Submarket Areas
Submarkets are based on some of the same
premises ass neighborhoods, althoughh they tend to
push the
envelope outward
a bit to enfold a broader area that has greater scale and diversity, but is still bound
together by some common thread.
Third Party Delineations. Proprietary submarket delineations are made by national and local firms
that track local real estate activity. In general, theyy are relatively broad geographic areas that have
sufficient scale and activity to justify treatment ass distinct areas (e.g., South Lake Union, South
Seattle, the Eastside). Since analysiss of real estate opportunities hinges on such data, these
delineations can have a significant effect on how the real estate market views a particular site in
terms of "comparable" dataa and should not be overlooked.
Customized
Submarket Delineations. An individual analyst can generally conduct more precise
and revealing
analysis of
markets by piercing beneath the broad delineations created by various
vendors, focusing on the submarkets that are appropriate for a given site based
on subjective criteria
dictated by the site itself and the nature of the decision for which the analysis has been undertaken.
Submarkets and Trade Area Delineation
Trade Areas. The focus of
neighborhood
ds and submarket
delineation is to identify relevant
geographic areas that provide the
spatial context within which a site
operates. On the other hand, the
notion of "trade areas" focuses on the
issue of marketability, of delineating
the geographic area that will general
the demand for goods and services
that are offered on a particular site.
The geographic scope of various trade
areas will depends on the nature of
use being considered for a particular
site, and the nature of demand in terms
Exhibit 3- 13
of magnetismm (i.e., drawing power) or convenience that determines the ultimate productivity
for the
use on the site. For example, in the case
of retail uses, three trade
areas are typically delineated:
primary which is the area within which 70% of saless will be drawn, secondary within whichh another
20% of sales will be drawn, and tertiary, from withinn which the final percent of sales will emanate.
In addition to site-specific factors (e.g., scale, linkages), delineation of trade areas will depend on the type
and profile of the potential users in terms of market draw and market capture ratios. In the case of
"walkable retail," the trade area may be co-terminus with the neighborhood, with the
bulk of saless coming
from local residentss and employees. On the other hand, specialty retailers and big-box tenants may draw
from a large trade area that extends beyond the immediate environs and
outside the boundaries of
the local
market
itself.
78

Linkage Attributes
Linkages and Connectivity
Linkage analysis should focus on
key
ancillary facilities that are relevant to a
particular site and/or property. The
identification of such facilities should
be based on two drivers; the general
submarket in the broader market in
which it is situated, and the market,
submarket or trade area within which it
competes for space users and/or market
support.
Chapter3: Multi-Dimensional
Nature of Real Estate
Physical Connectivity. The
key
facilities will vary depending on
the nature and scale of potential
users, but will typically include:
Exhibit 3- 14
major retail centers or nodes,
centers of office and other employment,
housing and recreation; discussion should also summarize
current land form breakdowns, along with other factors that affect real estate utilization decisions.
Two dimensions of linkages
are important to the real estate market; the physical path, and the
perpetual path or the "perceived linkage"
among key uses that are ancillary to, or supportive of, the
recommended
use.
Vehicular Connectivity. Vehicular and pedestrian circulation routes in the immediate environs will
be
one of the key issues that affect the potential uses of many sites. In this analysis, special attention
should be paid
to major arterials and other "connections" that provide linkages to other sub-markets
or
to major transportation corridors. In addition to pointing out the
corridors, the discussion should
indicate the traffic flows within, and through, the neighborhood.
Pedestrian Connectivity. With respect to pedestrians, attention should also be paid to streett and
sidewalk corridors, along with special walking paths and bike routes. The levell of detail will depend
on
the type of uses being explored.
Transit Connectivity. Where appropriate, special attention should
be paid to mass transit and other
forms of transportation that serve the neighborhood orr submarket. This is particularly important in
light of the renewed interestt in “transit-oriented-development” and
urban infill. Modes of public
transit should include bus, light rail, and bus rapid transit (BRT).
Qualitative Connectivity.
In addition to
the proximity and speed of connections, linkages are also
affected by some of the more qualitative dimensions of the linkage
routes. Examples of such
variables
include lighting, crime rates, maintenance of uses, types of uses, traffic levels, pedestrian corridors,
bike paths and other attributes that affect
the quality of the connections. This type of analysis is
particularly important in cases where a site is on the fringe of a neighborhood, with the usage
decision
hinging on whether the developer can effectively linkk the site to the desired area, or whether it will be
doomed to be in a different,
and often less attractive and viable, sub-market.
© JR DeLisle, PhD
79

Multi-Dimensional Nature of Real Estate
The Asset Class Debate
Is Real Estate an Asset Class?
Background
The question of whether
real estate is a distinct
asset class or merely an
industry sector is one of
the most critical issues to
face the industry. The
sheer fact that this
question remains
unresolved some 20 years
after the debates first
surfaced punctuates the
plight of the discipline (or
lack thereof). The ultimate
Significance of Debate
•If Asset Class, fiduciary standard
requires allocation to real estate for
diversifcation benefits
•If Industry Sector, fiduciary standard not
require real estate but may include
depending on competitive nature of
investment
Criteria for Asset Class
•Unique Assets
•Unique Market
•Meaningful Distinction
•Significant Opportunities
Exhibit 3- 15
resolution of the issue will determine how the industry business should be conducted by professionals, as
well as how investors and others should approach it. The failure to resolve this debate in the affirmative
will doom the industry to repeat the past and fail to move forward as a unique discipline. It will also
determine how it is approached vis-à-vis other asset classes. For example, if real estate is deemed an asset
class, fiduciary standards require allocation to real estate for diversification benefits which will set the
standard for non-fiduciary accounts as well. Further, as an asset class, formal education and training will
be required to address its uniqueness and the uniqueness of the market in which it operates. At the same
time, the rationale for allocating investments to real estate will be re-affirmed and investors and others will
have clear guidance on how to approach it from a
fundamentally sound basis.
… if real estate is deemed an
Criteria for Asset Class
asset class, fiduciary standards
At the most basic level, the major asset classes of a country
consist of those assets which make up the majority of its require allocation to real estate
investable wealth. According to some sources, stocks, for diversification benefits
bonds and real estate make up over 90% of the world's
which will set the standard for
investable institutional-grade wealth. These investments
can be disaggregated into a number of major asset classes
non-fiduciary accounts as
including: large and small capitalization domestic stocks; well. Further, as an asset class,
international stocks; long-term and intermediate-term formal education and training
Treasury and corporate bonds; U.S. and global bills;
will be required to address its
mortgage-backed securities and direct real estate ownership.
The remaining investable institutional wealth is composed uniqueness and the uniqueness
of precious metals and other assets, which are closely held of the market in which it
and are traded infrequently. Each of the major asset classes operates.
can in turn be subdivided into a number of sectors. The
inability to assign real estate to an existing asset class
provides some industry support for the acceptance of real estate as a distinct asset class. However, in order
80

Chapter3: Multi-Dimensional
Nature of Real Estate
to resolve the issue it is necessary
to explore the general criteria that must be satisfied
to achieve
designation as an asset classes: unique assets and unique market mechanism, meaningful distinctions and
significant opportunities.
Unique
Assets and Unique Market Mechanism
•Real asset base, value derived
•Localized demand
•Lumpiness,
inherent residuals
•Fixed location; vulnerablee to
externalities
Unique
Nature
Operational
Dimension
•Asset & Property
Management Control
•Rent roll & Leasing
management
•Tenant improvements
•Capital expenditures
Performance
& Risk
Management
Unique
Market
Mechanism
•Period cash
throw‐off
•Operating ratios
•Market Value fluctuations
•Proacitve risk management
•Financial ratios
•Inelastic supply,
elastic demand
•Inefficient
Market
•Negotiated priciing
•Inherently
behavioral
Exhibit 3- 16
Unique
Assets & Operational Dimension
Real Asset Base. Real estate is comprised of land andd improvements; while the
bricks and mortar are
a wasting asset, the land typically has an
enduring value which may be independent of existing usage;
despite the existence of common asset composition off land and improvements, real estate is not
comprised of fungible products, but products which are fixed in location.
Partially Derived Asset Value. The value of the underlying land is a function of externalities, of
linkages and infrastructure investments which are not t controllable by owners; real estate values are
subject to windfalls and wipeouts associated with government entitlements.
Production Function. Unlike other intangible assets which can be
created by paperwork, commercial
real estate must be producedd through a long, capital-intensive, labor-intensive process; this production
requires the coordination of
a wide number of participants rangingg from technicians to regulators.
Risk Characteristics. The unique risks associated with real estate area key feature that distinguishes
it as an asset class. s For example, real estate investors face a range
of micro risks associated
with an
individual building (e.g., quality of construction, deferred maintenance), as well as loss of tenants due
to
bankruptcy or store closings. On the other hand, they also face more macro risks as in the case
erosion in market rents due to an imbalance in supplyy and demand, and a change in value associated
with increasing
interest rates or investor returns.
© JR DeLisle, PhD
81

Multi-Dimensional Nature of Real Estate
Durable Product. Unlike many other asset classes and sectors, real estate assets cannot be easily
recycled; in addition to requiring on-going maintenance and insurance, risk exposures associated with
real estate investments (e.g., environmental) cannot be extinguished by merely transferring title in
return for some consideration; environmental exposures can be traced back to prior owners who have
presumable transferred interests.
Management Control. Investors – especially nondiscretionary investors– operating on their own or
with the advice and assistance of a range of service providers can exert direct control over business
operations. This control can operate a different levels, focusing on individual investments or
balancing portfolios to achieve specific goals and objectives.
Unique Market & Performance Attributes
The nature of market, price-setting and underlying demand
functions are unique; in the aggregate the sectors within the asset
class must exhibit some underlying commonalities which affect
performance and can be quantified.
Imperfect Market. Interests in real estate, unlike the vast
majority of assets, are traded in an imperfect market, in
which information is scarce and costly, transaction costs are
high, the number of transactions is low relative to the total
number of assets, and prices are set through decentralized
negotiations between buyers and sellers.
Price-setting Process. Prices are established on a
transaction-by-transaction basis. They are the result of
…information is scarce
and costly, transaction
costs are high, the number
of transactions is low
relative to the total number
of assets, and prices are set
through decentralized
negotiations between
buyers and sellers.
negotiations in which buyers and sellers start with their subjective value beliefs and try to arrive at a
mutually agreeable price. While both parties might be able to see study the rent roll, the owner might
have better insight on the likelihood that tenants will renew leases. Thus, imbalances in information
create an unequal footing that may affect prices. The parties also have to rely on projections of
market conditions, leading to uncertainty that can affect the ultimate price.
Illiquidity. Real estate has generally been recognized as an illiquid asset; unlike other assets, there is
no established ready market and no clearinghouse for secondary transactions although such initiatives
are being launched; due to the lumpiness of investments and the inefficient nature of the market,
transactions which do occur require a significantly longer period of time than other asset classes.
Localized Demand. Despite the increase in globalization of financial markets, real estate remains
largely a local market product; demand is a function of relative supply in the context of physical
space and logistics.
Lumpiness. Unlike most other institutional investment classes, real estate remains a "lumpy"
investment, an investment with high per unit values stemming from the capital intensive nature of the
assets; an exception is the growing body of securitized products.
Nature of Returns. Real estate returns are comprised of two elements; income and capital; income
returns are partially determined by existing leases and foreseeable leases; capital returns are
established by required investor yields (i.e., cap rates), projected net income levels and anticipated
asset demand.
82

Chapter3: Multi-Dimensional
Nature of Real Estate
Pattern of Returns. Institutional real estate has relatively low correlations with
other asset classes
ncluding stocks and bonds;
returns differ in part due to the dual sources of returns --income and
appreciation--
and the contractual nature of the underlying leases not available to other asset classes.
Meaningfully Different and Significant Assetss
The asset class must exhibit underlying product and market fundamentals which distinguish performance
and are
subject to prediction.
Meaningfully
Different & Significant Asset Class
•Measurable
performance
•Possible High
Rewards
•Property & location
diversity
•Sub‐property
type
diversity
•Variety of investments
Meaningful
Asset Class
Heterogeneous
Asset Class
•Competitive returns
•Possible above‐market
returns
•Core, Value‐add &
Opportunistic
Viable Asset
Class
Significant
Asset Class
•Domestically over $3‐
$5 trillion
•Private and public
•Many nvestment
options
Exhibit 3- 17
Meaningful & Measurable Performance
A number of return series are available to gauge real estatee performance; sources range from industry
benchmarks published by trade groups including NCREIF on the equity
side and the American Council of
Life Insurers (ACLI) on the debt
side; return series are alsoo published by a number of consultants and other
facilitators; available indices can
be used to establish performance bogeys which can
be stratified along
major sector lines.
Heterogeneou
us Asset Class. Most investment classess or market sectors are relatively homogeneous;
although real estate has the common thread of an underlying real asset base and
an income
component, institutional-grade investments can be aggregated into
property type and locational
subclasses.
Long-term Cycles. Most other asset classes have short-to-intermediate investment cycles; core
institutional real estate investments – excluding opportunistic investments which focus on timing
strategies– have long term (e.g., 10-12 year) cycles, varying in length by submarket and property
specific factors.
© JR DeLisle, PhD
83

Multi-Dimensional Nature of Real Estate
Significant Size and Viable Opportunities
In the aggregate, comprises a significant level of wealth. At the same time, it includes a number of
investment opportunities for which the reward and/or risk reduction is associated with understanding the
asset class.
Size of the Pie
Size of the Pie: U.S. Trends in Investable Real Estate
Size of the Pie. Estimates of
relative levels of investable
wealth suggest the value of
commercial institutional grade
real estate in the US
approaches $5 trillion. This
value is significantly higher
when looking at the aggregate
global value of real estate. In
terms of market share, it
appears commercial real estate
comprises some 20% of total
Public Debt
9%
1982: $529 Billion
Public
Equity
1%
Private
Debt
72%
© JR DeLisle, Ph.D.
Private
Equity
18%
Public Debt
10%
1990: $1.4 Trillion
Public
Equity
2%
Private
Debt
59%
Private
Equity
29%
Source: Geltner
Public Debt
19%
2002: $2.7 Trillion
Public
Equity
6%
Private
Debt
48%
Private
Equity
27%
2010: $3-5 trillion
wealth; within the asset class,
Exhibit 3- 18
significant holdings are
attached to the major asset classes (i.e., property type and location) affording the ability to establish
meaningful portfolios within the asset class.
Investment Opportunities. A diverse array of investment opportunities are available to institutional
investors; investments may take the form of a variety of structures and investment vehicles; due to the
lumpiness of investments, opportunities to structure a meaningful real estate portfolio can be executed
at the individual property level, the fund or co-investment level, and the portfolio level.
Reward for Understanding. Real estate investment performance depends on the careful
coordination of a number of factors of production, operation and consumption; understanding the
strategic and dynamic forces of demand and supply can provide high rewards; failure to understand
such fundamentals can create wipeouts; due to market imperfections, ability to make informed
decisions can provide a competitive edge which can be used to beat the overall market.
84

Chapter3: Multi-Dimensional Nature of Real Estate
Interdisciplinary Nature of Real Estate Asset Class
Interdisciplinary Nature of Real Estate
Interdisciplinary Spectrum: A Life Cycle Approach
Money-Time
Value
Income
Costs Construction/ Time ====>
Acquisition Cost
Planning Acquisition/Production Operation Disposition
Acquisition Team Acquisition Officer Accounting Team Asset Manager
Appraiser Architect Asset Manager Disposition Team
Broker Engineer Investor Relations Officer Appraiser
Consultant(s) Closing Attorney Lease Adminstrator Broker
Cost Estimator Conduits Leasing Representative Closing Attorney
Developer Contractor Lessee Consultant(s)
Environmental Officer Construction Lender Management Company Financial Analyst
Financial Analysts Due Diligence Officer Portfolio Manager General Partner
Financial Advisor Escrow Agent Property Manager Investment Committee
Feasibility Analyst Equity Investor(s) Risk Manager Joint Venture Partner
Market Analyst General Partner Servicing Agent Limited Partner(s)
Other Stakeholders Grantor/Grantee Management Company
Guarantor
Market Analyst
Interim Lender
Portfolio Manager
Investment Committee
Property Manager
Interior Designer
Risk Manager
Joint Venture Partner(s)
Tax Advisor
Landscape Architect
Lease Abstractor
Limited Partner(s)
Marketing Manager
Mortgage Banker/Broker
Permanent Lender
Project Manager
Subcontractor(s)
Tax Advisor
Title Search/Abstractor
© JR DeLisle, PhD
Exhibit 3- 19
85

Multi-Dimensional Nature of Real Estate
A Life Cycle View of Real Estate Participants
Real estate is an interdisciplinary field focused on the creation,
acquisition, operation and or disposition of real estate assets.
Further complicating the discipline is the fact that different
skills sets and/or expertise are required during the distinct
phases of a property’s life cycle. At the same time, the real
estate asset or portfolio of assets must be managed in a
continuous manner to avoid short-term situations which could
lead to insolvency of the enterprise or compromise long-term
values. As such, real estate professionals and those in ancillary
fields should be aware of the fundamental premises of the
various disciplines and understand the roles they play and
standards to which they must perform. The need to synthesize
inputs from these diverse disciplines creates the need for a
generalist approach to real estate education. Under this model,
students must develop a basic understanding of the related
disciplines and the “best practices” that are embedded in each of
them. While no individual can master the full array of skills
and perspectives involved in the real estate enterprise, this broad
approach is necessary to create, maintain and capture value over
the full product life cycle.
The intellectual demands
embedded in this broad,
interdisciplinary
framework are much
higher than if real estate is
approached as a narrow
field or if players focus on
the particular phase of
activity in which they are
directly engaged. In effect,
the level of performance
achieved at each phase has
a material –and often
irrevocable impact—on
future performance.
The intellectual demands embedded in this broad, interdisciplinary framework are much higher than if real
estate is approached as a narrow field or if players focus on the particular phase of activity in which they
are directly engaged. In effect, the level of performance achieved at each phase has a material –and often
irrevocable impact—on future performance. Thus, real estate professionals must be capable of drawing
from these related disciplines and applying the relevant concepts to the problem or decision at hand.
Furthermore, they must be able to make the appropriate adjustments to extend these concepts to the
imperfect and idiosyncratic real estate market. The ultimate goal of this approach is to create critical
thinkers who can ask the appropriate questions of the experts from the related disciplines that ultimately
have to be called upon to ensure a project is sustainable and has a value today and tomorrow. It also
provides a framework that allows individual players to focus on the role they play in the enterprise team.
Planning Stage
Acquisition Team. Acquisition officers are focused on several key
tasks: sourcing potential acquisitions; pricing potential purchases;
negotiating the acquisition agreement; and, closing the deal. Depending
on the scale of the operation, the acquisition team may have the final
say in closing deals. However, in larger operations or those that provide
third-party advisory services or operate under a fiduciary standard,
deals may have to be approved by an Investment Committee. Similarly,
if the party is acting as an agent, the ability to close will depend on the
degree of discretion that has been established by the advisory contract.
86

Chapter3: Multi-Dimensional Nature of Real Estate
Appraiser. A person or entity who performs valuation services in compliance with relevant
professional standards and best practices. Depending on the jurisdiction and professional regulations,
may require license or certification to be eligible to provide such services for a fee. The appraiser
may also perform feasibility analysis or other consulting studies as part of an overall business.
Broker. A professional who acts on behalf of another party in the sourcing or placement of products
or businesses and serves as an intermediary between buyers and sellers of goods and services. This
party is generally compensated on transaction volume although fee arrangements may be negotiated.
Depending on jurisdiction and governing laws, may need to be licensed or certified to conduct
business.
Consultant(s). A broad category of professionals who provide analysis,
conduct research, provide decision-support, or make recommendations
regarding a course of action for a client. Such services may be focused
on a particular business decision or situation, or may be provided in an
on-going relationship through a retainer or other contractual
arrangement.
Cost Estimator. The professional charged determining the likely costs
to be incurred in the production of improvements or other development and construction activities in
a given market setting with respect to specified products and
quality levels.
Developer/Development Team. A person (or company)
who takes the lead in converting unimproved property into
improved property through the procurement and deployment of
resources, management of risk, and coordination of the factors of
production. The developer operates as the quarterback or team
leader who manages the overall venture and ensures that other
players complete their obligations and deliver promised goods and
services in a timely manner. In some respects, this party is a
visionary who starts with a concept and then becomes a tactician
who puts the overall package together, marshaling appropriate
space-time, money-time resources, as well as securing tenants and
managing the production process.
Environmental Officer. The party responsible for
providing a formal review that is conducted prior to a loan or transaction to determine the existence
and extent of any environmental problems or exposures that may
need remediation or cloud the title.
The developer operates
as the quarterback or
team leader who
manages the overall
venture and ensures that
other players complete
their obligations and
deliver promised goods
and services in a timely
manner.
Financial Analysts. A group of professionals who analyze the
financial conditions of companies and investments looking at such
items as financial statements, earnings forecasts, executive interviews
and industry trends.
Financial Advisor. A professional money manager or advisor who
provides financial advice to clients for a fee, commission or other form of compensation. In some
cases, the advisor will operate as a fiduciary and will be held to a standard of professional conduct
which specifies the minimal standards of conduct a service provider or agent must satisfy in serving a
client. In addition to maintaining high professional standards, a fiduciary must act with loyalty,
exclusivity, and act in the best interest of the client.
© JR DeLisle, PhD
87

Multi-Dimensional Nature of Real Estate
Feasibility Analyst. Third party –or sometimes internal—analyst who performs studies that explore
solutions to a range of real estate problems including: a site in search of a use as embedded in a
development project. Feasibility analysts also conduct “investor in search of
involvement” studies in which an investor is searching for an investment
option that will satisfy goals and objectives. This type of analysis is essentially
a consulting study in which the consultant seeks optimal solutions for a client
in light of specified goals and objectives, subject to various constraints,
preferences and market forces.
Market analysis is
conducted to help
determine the degree
of saturation and to
help quantify the
competitive
environment within
which a new or
existing venture will
operate.
Market Analyst. Professional within a
firm or operating on a third party basis who explores the level of
demand and supply in a given market or trade area It involves the
process of reducing aggregate data to factors relevant to a site focusing
on competitive demand and supply elements beyond control of
developer.
Other Stakeholders. Various parties, entities or individuals
potentially affected, or impacted by proposed actions or developments.
While some of these parties may not be “privy of contract” and have
legal standing, in some jurisdictions they can have a significant impact
on land use decisions and development. Thus, their concerns and
relative positions should be considered by real estate decision-makers
and affected third parties.
Acquisition/Production Players
Acquisition Team. In medium to large-size firm that are
searching for new investments, a position as head of
acquisitions may be created. This individual may spearhead a
team charged with sourcing new investment activities. This
front-line position is often compensated on an incentive basis,
with bonuses depending on the value of acquisitions. As such,
acquisition teams have something of a bias toward doing deals,
although many organizations have a system of checks and
balances to ensure they do not get too exuberant and focus too
much on the volume side and not enough on the performance
side of the acquisitions.
Architect. The professional that focuses on designing buildings
and spaces to satisfy spatial demands of the most likely users of
the space as well as other parties who will be affected by its
design, materials, finishes and other physical elements.
Engineer. The professional that concentrates on the design,
specification and operation of buildings, structures, systems
and other physical elements associated with a project or
facility.
…acquisition teams
have something of a
bias toward doing deals,
although many
organizations have a
system of checks and
balances to ensure they
do not get too exuberant
and focus too much on
the volume side and not
enough on the
performance side of the
acquisitions.
88

Chapter3: Multi-Dimensional Nature of Real Estate
Closing Attorney. Commercial real estate transactions are often
complex legal agreements, exposing the buyer or investor to a number of
risks. On the residential front, some of these risks are managed through
laws designed to protect consumer. On the commercial front, there are less
protections which may trigger the need to retain a lawyer to affect the
closing and to make sure risks are properly managed.
Conduits. The entities, companies or individuals who serve as an
intermediary, providing a pooling and matchmaking service between two parties as in the case of
CMBS origination or other mortgage packaging functions.
Contractor. The party or entity in charge of physically erecting a property, combining materials,
supplies, tools, expertise and labor to build a project or physical improvements. The term applies to
those who manage the production of new buildings; the expansion,
remodeling, alteration, or renovation of existing buildings; or, the
provision of the initial equipment of buildings.
Construction Lender. A third party source of capital who advances
money to a developer or investor to construct, or renovate/rehab, a
property. Typically assumes a short-term position that will be retired
through a permanent loan take-out or the sale of components. To protect
lender, funds are advanced through draws to ensure that value is created
as funds are disbursed.
Due Diligence Team. Since acquisition teams are on sourcing deals and tying up investments, a
system of checks and balances must be put in place to ensure the risk of potential investments are
fully understood and priced into the final offer. This service is typically covered under the “due
diligence” umbrella. Due diligence teams underwrite a variety of risks associated with the underlying
property, parties to the transaction, tenants who comprise the rent roll, and other elements of the deal
which create potential risks.
Escrow Agent. Third parties who serves as a repository for
closing costs and other disbursements along with key documents
and fees.
Equity Investor(s). The party or parties that provide the
ownership capital associated with the development or acquisition of
a property. This type of investment position is opposite to a
mortgage or debt position that conveys no rights or claims in a
property beyond those specified in the mortgage agreement related
to interest and principal payments. The investor may own the
property outright as a developer/owner or through some partnership
or otherwise structured venture.
Due diligence teams
underwrite a variety
of risks associated
with the underlying
property, parties to
the transaction,
tenants who comprise
the rent roll, and
other elements of the
deal which create
potential risks.
General Partner. In the case of a partnership, the
managing player who makes the key management and operating
decisions regarding a real estate venture. This party typically has
both the authority and responsibility to make decisions and
commitments and is the lead party.
Grantor/Grantee. The Grantor is a person or party who conveys or transfers a property or interest to
a third party. The Grantee is a person or party who purchases a property or interest.
© JR DeLisle, PhD
89

Multi-Dimensional Nature of Real Estate
Guarantor. The party who provides the guarantee related to some financial agreement or other
performance requirement. The Guaranty is a form of credit enhancement in which a third party
backstops or ensures performance of some specified financial obligation of another party or business
activity.
Interim Lender. In some larger projects or where a developer/investor may be undercapitalized in
terms of a reserve, a standby commitment may be obtained. This standby could kick in to fill the gap
between the disbursement of a permanent loan funds are made and when the construction lender is
due for a take-out. This might be related to construction delays or the inability to hit preleasing or
other underwriting requirements established by the permanent lender. The interim loan could also be
a gap loan, helping close the void the may emerge between total available equity and total permanent
loan commitments. This could be due to cost overruns or the inability to hit loan-to-value or debt
coverage ratios.
Investment Committee. In medium to larger operations, a
formal investment committee may be appointed to determine
the resolution of acquisition, renovation/rehabilitation or
disposition decisions. Investment committees are particularly
true in firms in which the party acts as a fiduciary for third
parties and must make sure that adequate protections are built
in to avoid biased decisions that are driven by internal or
personal factors rather than investment performance or clients’
needs. The composition of investment committees varies, but
typically includes the senior leaders from the major business
units in the firm.
Interior Designer. A design professional charged with
designing, laying out, finishing out, specifying and furnishing
the interior or common areas of a building or, in some cases,
tenant spaces.
Joint Venture Partner(s). In some large-scale projects, the
ownership structure may be a joint venture. In such cases, the
legal entity is formed for a specific project or series of projects.
The parties share in control according to some predetermined
Investment committees
are particularly true in
firms in which the
party acts as a
fiduciary for third
parties and must make
sure that adequate
protections are built in
to avoid biased
decisions that are
driven by internal or
personal factors rather
than investment
performance or
clients’ needs.
agreement. On the other hand, they assume joint and severable liability for all actions of the venture
or the other partner.
Landscape Architect. A professional that focuses on the design, materials, composition and
construction of outdoor spaces to complement buildings and other on-site improvements.
Lease Abstractor. A professional who can review a lease and extract the key components of a lease
agreement including such items as names of the parties, delineation of the space, specification of
consideration, time frame, options, concessions, and covenants. The abstract also indicates the
responsibilities of the parties and may cover tenant credit.
Limited Partner(s). In the case of a limited partnership, the entity includes limited partners whose
liabilities in a venture are limited to their equity position; a party who trades liability limits for
management and operational control or oversight.
Marketing Manager. An in-house or third party who develops and implements a marketing strategy.
This strategy outlines a marketing program for a specific product, service or business. The program
addresses how the marketing mix of product, price, place, promotion and physical distribution will be
90

Chapter3: Multi-Dimensional Nature of Real Estate
blended over time. It also establishes the budget, strategies and tactics that will be incorporated as
well as the metrics that will be used to judge the performance of the overall program.
Mortgage Banker/Broker. An individual or entity that originates
mortgages for a third party. The banker may use personal equity to
originate and/or warehouse loans. These mortgages are held while a
pool is being assembled; such holdings are for a relatively short term
until the completed pool can be transferred to other sources of capital.
As such, the position exposes the party to interest rates and other
financial risks which may leave them in a negative equity position.
This position is opposed to that of a Mortgage Broker who originates
mortgages for a third party or portfolio investor as a correspondent or agent.
Rather than taking equity positions, they rely on other sources of capital to support individual
transactions.
Permanent Lender. The mortgagee or party that advances capital to fund a real estate transaction. In
return, this party receives a promissory note that documents the borrower's obligation to repay the
mortgage as well as a pledge of the underlying property interest which collateralizes the loan. In
some cases this may be a direct lender or the primary lender who originates, underwrites and initiates
a mortgage or loan, providing funds to the borrower and engaging in a contractual obligation.
Project Manager. A professional charged with the oversight of the construction or redevelopment of
an individual property to ensure the project gets built per specs, on time and on budget. Since there
are a number of moving parts and associated risks, the project
manager is often critically important to ensure the project makes
satisfactory process and that obstacles that periodically arise are
addressed in a timely manner.
Since there are a
number of moving
parts and associated
risks, the project
manager is often
critically important
to ensure the project
makes satisfactory
process and that
obstacles that
periodically arise
are addressed in a
timely manner.
Subcontractor. In many complex projects, contractors will
retain third-party specialists to perform certain construction-related
tasks. These parties are under contract to the contractor who
coordinates the overall process (aka, General Contractor) but have a
direct lien (i.e., mechanics lien) against the underlying property in the
event of a payment problem or other dispute.
Tax Advisor. The taxation of commercial real estate projects
is complex and can have a significant impact on after tax returns.
This caveat is true for individual parties, as well as for any special
purpose entities that may have been created to conduct business. In
the cases of partnerships, rules of eligibility must be satisfied at
inception, and must also be maintained to avoid dissolution of the
partnership which could have extremely significant tax consequences.
Title Searchers/Abstractors. Third party professionals who
conduct the investigation, review or analysis of the public records to trace the chain of title for a
property and identify any liens, claims or inconsistencies that would somehow cloud the title and/or
limit its validity or coverage.
© JR DeLisle, PhD
91

Multi-Dimensional
Nature of Real Estate
Operational Players
Accounting Team. Close attention must
be paid to the books during the
operational phase of a project, accounting for all revenues, expenses and
other cash and/or accrual items. Depending on the nature of ownership,
current capital account balances must be maintained for both the equity and debt positions. In
effect, a
real estate project is an enterprise for which a numberr of periodic reports must be prepared. At the
same time, accountants must be able to generate special reports that may be triggered by some
deviation from
the pro forma, budget or other projections.
Asset Manager. While all real estate projects possess some
Asset managers are
underlying commonalities, there is significant heterogeneity
among property types and locations. Depending on the nature of specialists who are
the asset and its tenancy, there may be different drivers of value focused on one or
and/or critical success factors that require specialized skills and
more property types
close attention. Indeed, a number of emerging trends and
unexpected events can disrupt the “rules of engagement” and
and servee as a
put the value of individual assets at risk, or require some
resourcee for portfolio
proactive intervention to maintain and/or
enhance value. Asset managers who operate
managers take on the role as specialists who stay on top of these
at a more
strategic
elements, staying connected
with the market. Asset managers
are specialists who are focused on one or
more property types level and
property
and serve as a resource for portfolio managers who operate at a managers who operate
more strategic level and property managers who operate at at tactical level
tactical level dealing with the day-to-dayy operations.
dealing with the day-
Investor Relations Officer. The individual or team charged
with managingg relationships with investor-clients andd analysts to-day operations.
for public companies, partnerships, ventures and funds
providing investment or real estate services.
Lease Administrator. A party charged the creation, compliance, collections and disbursement of
funds as specified in the lease and as necessary to maintain and operate a property. The administrator
may also be charged with monitoring rent roles and overseeing tenant relationships.
Leasing Representative. An agent or employee of the property management or
leasing company
who representss the ownership position in
lease negotiations, operations and management working as a
liaison between
tenants and
ownership with an agencyy responsibility to the owner.
Lessee. The party to a contract who obtains the right to use or occupy space for
a given period of time
subject to certain restrictions and in return for some form of compensation or
remuneration.
Also known as tenants, in the aggregatee these parties provide the
revenue stream
for a leased property. The combinationn of tenants can affect the
risk/return relationship which affects value.
Management
Company. The company
or party whoo handles on-going
operations for a project, overseeing maintenance, administration and other
operational items. In many cases, these services are provided by third parties. In
the
case of larger integrated companies, management mayy be providedd in-house.
92

Chapter3: Multi-Dimensional Nature of Real Estate
Portfolio Manager. Once a certain scale of operations has
…the portfolio been achieved and several properties have been assembled, the need to
manager is the manage investments takes on a different scale to ensure that they whole
is worth more than the sum of the parts. At this level, management
quarterback of the
focuses attention on the “bundle of assets,” trying to maintain
investment team,
solvency, capture periodic returns and enhance value of the aggregate
making sure that holdings. This function is somewhat strategic, focusing attention on
the portfolio
decisions that affect the longer-term including asset assemblage,
diversification and risk/return profiles. In essence, the portfolio
composition,
manager is the quarterback of the investment team, making sure that
operation and the portfolio composition, operation and support are adequate to
support are
achieve the goals and objectives for which the portfolio was
adequate to achieve assembled.
Property Manager. An individual or company the directs or
the goals and
performs the actions taken during the ownership or operating period to
objectives for ensure that a property is adequately maintained and serviced. This
which the portfolio party focuses on daily operations including cleaning, utility charges,
was assembled.
routine repairs, security, tenant calls and other on-going obligations.
Risk Manager. A professional charged with manage the
uncertainty associated with the acquisition or operation of property. The process, which is on-going,
includes such tasks as identification of exposures, determination of alternative approaches, selection
of an approach, implementation and monitoring and feedback to increase confidence levels or to
reduce uncertainty to a tolerable level.
Servicing Agent. The agent who provides loan servicing including collection of mortgage payments
and escrows, dispersal of funds, documentation of payments, notifications of late payments, and
overall loan management. The agents providing these services are compensated by fees that are
based on the outstanding mortgage balances. They may also receive incentives that can be associated
with performance or the provision of special services.
Disposition/Reposition Players
While the act of selling or otherwise disposing of an asset may appear to
be a discrete act, in reality it is part of the continuum of the overall life
cycle of an asset or portfolio of assets. In some respects, it can be
considered the act of harvesting the value of the real estate, of converting
the asset to cash to be redeployed for other purposes. Since it reflects the
culmination of the investment cycle, many of the players involved in this
phase of the enterprise are the same players that were involved in the
planning, acquisition/production, and operational phases. Indeed, in the
dynamic environment within which real estate operates, many owners
will subject assets to hold/sell analysis on an annual basis as part of a
proactive management style. This type of analysis should be focused on
the future value rather than on recent history to avoid disposing of an
asset that may have provided disappointing performance over the short
term, but is positioned to provide strong, competitive performance going
forward.
…in the dynamic
environment within
which real estate
operates, many
owners will subject
assets to hold/sell
analysis on an
annual basis as part
of a proactive
management style.
© JR DeLisle, PhD
93

Multi-Dimensional Nature of Real Estate
The interest in annual hold/sell analysis is enhanced when the investor/owner is
required to mark assets to market. In effect, that act of “mark-to-market”
creates unrealized gains or losses which become part of the historical return
series for an asset. These positions are “unrealized” in the sense that they
have not been locked in through a transaction, but are paper positions based
on appraised values. However, the fact that they have not been realized does
not imply that they are trivial. Indeed, in a number of situations changes in the
aggregate value of the underlying assets has significant impact on related events.
For
example, in commingled funds, beneficiaries can periodically withdraw or add to their holdings, the
current market value becomes the benchmark that is used to determine their pro rata situation. Similarly, in
the REIT industry, analysts and investors track how the aggregate value of stock compares to the
cumulative value of the underlying assets. This ration is referred to as Net Asset Value (NAV) ratio. It
indicates if NAV is at a premium (i.e., stock trades above collateral value) or discount (i.e., stock trades
below collateral value) which suggests if a stock is temporarily overvalued or undervalued.
In the case of repositioning or redevelopment activity, the relevant players and key decision-makers take
on something of the same persona as the initial development team. However, a distinguishing element of
the real estate asset class at the disposition phase of the cycle is the “insider information” that hands-on
experience in the day-to-day operation of the project has provided to the manager over time. This insight –
…a distinguishing element
of the real estate asset class
at the disposition phase of
the cycle is the “insider
information” that hands-on
experience in the day-to-day
operation of the project has
provided to the manager
over time. This insight
which is legal in real
estate…
which is legal in real estate—allows the current manager to
make decisions based on how the asset responded to various
externalities (e.g., market cycles, tenant turnover) in the past,
providing something of a precursor of how it may behave in the
future. This can provide an “informational advantage” over the
market which may not be privy to such information. On the
other hand, the experience with the asset may create certain
biases to sell or hold based on personal preferences, comfort or
other factors that have created a bond between the
investor/owner and the asset. To ensure that such relationships
do not distort the process, the decision-makers should pay
special attention to the need for an objective, dispassionate
decision that is consistent with the goals and objectives for
ownership and/or other forms of involvement.
94

Chapter3: Multi-Dimensional
Nature of Real Estate
Summary Chapter 3
Nature of Real Estate. Real estate is both a financial asset
and a physical resource, a resource that is comprised of the
Conceptss
site itself and the externalities
that surround
it and connect
it to other parcels or activities.
Static, Environmental and Linkages
Space‐Time, Money Time Components
Dimensionality
of Real Estate. Real estate is
comprised off
three major types of attributes: static or physical,
environmental or neighborhood, and linkages or
connections. Since these threee attribute categories are
Capital Markets
Spatial Markets
Neighborhoods & Submarkets
Unique Assets, Unique Markets
always changing, the real estate product is always
Operational Nature of Real Estate
changing.
Reall Estate Performance Characteristics
Real Estate Asset Class. Real estate is an asset class and Life Cycle Management
satisfies each of
the tests: it is unique, it is meaningful, andd
it is significant. As such, real estate should develop its ownn
theoretical foundation, drawing on other behavioral,
Space‐Time
physical and social sciences where appropriate.
Interdisciplinary
Nature. Although it is a separate asset
class, real estatee remains an interdisciplinary
field, drawingg
on
a number of related disciplines. These disciplines comee
in
at different stages of the product life cycle.
Best Practice Standards. The intellectual demands
embedded in this broad, interdisciplinary framework are
much higher than if real estatee is approached as a narrow
field or if players focus on the particular phase of activity in
which they are directly engaged.
Questions to Ponder
SEL Dimensions. How important are the three dimensions of real estate? Which of them are controllable
and which are not? Since all three are changing over time, is real estate a tangible asset or an intangible
one? How can the SEL be combined with market segmentation to create better spatial solutions?
Space‐Time, Money‐Time.
Which of the two components of real estate are more important? Can
you
operate in one area of the market or do you have to pay attention to
both? What key forces drive
the
money side of the market?
Alignment of Interest. Since there are three major player groups, how
can their interests be aligned to
result in better real estate decision‐making? Space producers are typically on the front line, while space
users are dependent on the options that are created for them. Does this equation work or is it just an
example of a “field of dreams?” How can
developers avoid having their dreams turn into nightmares? How
can the demand side be better represented in the process or is it working well the way it is?
Asset Class Debate. Where do you come
down on the asset class vs. industry sector debate? Is it
just a
matter of semantics or is it
real? Who is on what side of the debate and why are they there? Who
should
lead the charge and what’s
at stake?
Interdisciplinary Nature. Given the diverse array of professionals and related disciplines that must be
marshaled to
support the real estate market, is it truly a discipline orr just a compilation of other?
What is
the essence of the profession and how is
it doing under the status quo? What will the future of the
industry look
like and how should individuals prepare for the changess that are coming?
Barriers to Entry. Given the absence of a formal discipline, there are few barriers to
entry in real estate.
The exceptions may be in certain service areas such as appraisal, brokerage, construction, etc. Should the
real estate industry pursue
licensing and advocate for designations for developers and other key players?
Should theree be some competency testing in real estate? If so, who would set the standards and how
would it be administered?
Scope of Inquiry. The sheer number of players involvedd in the real estate industry can be daunting. How
should a young professional approach the field? Is it more importantt to develop expertise in a narrow field
where one can add value or should they focus on understanding how
it all comes together?
© JR DeLisle, PhD
95

Multi-Dimensional Nature of Real Estate
Next Chapter
96