Thesis Research
2003 Theses Abstracts
Following are a selection of theses abstracts by members of the Class of 2003. Join MITREX (The MIT Real Estate Exchange) to download complete theses. For non MITREX members, theses can be purchased from the MIT Libraries.
Strategic Benchmarking in Corporate
Real Estate
Zina Bdeir
Abstract
A Comparative Study of Condominium
and Single Family House Price Appreciation
in the Salt Lake Valley
John D. Billings
Abstract
Further Developing NPV Analysis to Evaluate
Real Estate Investment Opportunities
C. Walker Collier III
Abstract
The Market for Self-Storage in Greater
Boston: An Analysis of Facilities, Management
and Potential
Dustin J. DeNunzio
Abstract
Multi-Round Auctions for Institutional
Real Estate Assets: Theory and Practice
J. Aidan Foley
Abstract
Real Estate Opportunity Funds: Past
Fund Performance as an Indicator of Subsequent
Fund Performance
Cathy C. Hahn
Abstract
Master Lease & Leaseback of Government
Owned Real Estate: A Model for a Fixed Income
Investment Product
Jeffrey E. Hutchinson
Abstract
Volatility: A Statistical Comparison
Between the Secondary and Primary Home Markets
- The Lower Cape's Volatility and Average Return
Compared to Three Boston Area Primary Markets
Craig Knight
Abstract
Chain Hotels Versus Independent Hotels:
An Analysis of Branding, Room Revenue and Volatility
Tyler Langlois
Abstract
The Case for Pension Plan and University
Endowment Equity Investment in Brownfields
in the Urban Core of Major Metropolitan Areas
Tamara C. Larsen
Abstract
The Value of Flexible Design: Real Estate
Investment and Development Strategy Under Uncertainty
Benjamin A. Loomis
Abstract
Factors Influencing German Private Equity
Investment in US Real Estate
Kay Paelmo
Abstract
How Different Home Styles Are Valued
in the Salt Lake City Market
Barrett Peterson
Abstract
Thinking Outside the Big Box? Retailers
Look to America's Inner Cities
Adrian S. Quackenbush
Abstract
Mill and Mercantile Conversions: A Case
Study Analysis of Residential Adaptive Re-use
Projects
Zach E. Schaumburg
Abstract
Density Bonuses and Affordable Housing
in California: Examining the Economic Impact
on Three Cases
Kevin Skiles
Abstract
REIT Here, REIT Now! Should the UK Consider
The Introduction of a REIT-Style Vehicle
Nicholas A. Spencer
Abstract
Default Study of Commercial Mortgages
in CMBS Pools: An Empirical Analysis of Defaults
and Loss Severity
Rohit Srivastava
Abstract
Opportunities and Obstacles for US Investors
in Moscow: Office Market Comparative Return
Study
Alexander V. Stolyarik
Abstract
Real Estate Private Equity: An Overview
of the Industry and Analysis of Its Returns
Stephen M. Tang
Abstract
The Growth of Retail Reits - An Exploration
of Current Practices and Implications
A. Eric Toth
Abstract
Micro-Level Return and Volatility Drivers
in Boston's Single Family Home Market
Jay Valenta
Abstract
Returns in China Residential Development
Projects - A Practical Investment Evaluation
Procedure Developed for the Analysis of Chinese
Residential Development Projects Based on Modern
Financial Economic Norms
Qian Wang
Abstract
On the Waterfront: A 25 Year Study of
the Relative Risk & Return of Florida Single-Family
Waterfront and Inland Homes (1977-2002)
Forrest A. Westin
Abstract
An Investigation Into The Valuation
Behavior of Land Developers and Appraisers
Elizabeth Brooke Wolff
Abstract
Rent Adjustment Mechanism for Multifamily
Housing Market
Lee-Young Yun
Abstract
Industrial Property Performance and
Building Functionality
Yajie Zhao
Abstract
Strategic Benchmarking in Corporate Real Estate
Zina Bdeir
Thesis supervisor: Sandra Lambert, Lecturer, Department
of Urban Studies and Planning
This work examines the strategically focused benchmarking of corporate real estate units and the implementation of its results towards broadening their mandates. To illustrate how benchmarking of corporate real estate can add strategic value to an enterprise, this thesis presents data gathered through interviews with industry practitioners actively engaged In benchmarking practices.
As the corporate environment becomes increasingly competitive with a trend towards customer/market driven focus, corporate real estate departments are being elevated and gaining visibility within the firm. In response to the changing demands of business, they are becoming more proactive and shifting from the tactical project management to strategic portfolio and workplace management.
When corporations recognize that CRE units can add measurable value, they become an integral part of the strategic-decision making process. To this end, corporate real estate organizations have been participating in strategic benchmarking, through initiatives designed to examine their real estate performance in formal studies with peer companies. They have come to appreciate the benefits of the benchmarking process and recognize its limitations. But, most importantly, benchmarking has become an integral part of their research and strategic planning efforts, and an essential tool to help them achieve the competitive edge they are after.
A Comparative Study of Condominium and Single Family House Price Appreciation in the Salt Lake Valley
John D. Billings
Thesis supervisor: Dr. Henry O. Pollakowski, Visiting
Scholar, Center for Real Estate
This study examines whether the form of ownership affects the appreciation rate of housing units. The specific test conducted is whether condominiums and single family homes in the Salt Lake Valley have appreciated at the same rate over the past six and a half years. To test this hypothesis, a sample of 10,134 condominium and 48,913 house transactions was analyzed. The sales were grouped into eight geographic analysis areas. Hedonic models were used to quantify the contributory effect on value of the time of sale, age of the unit, and other significant housing characteristics. The price indices created by the hedonic models for each housing type are then compared within geographic areas and across the valley.
The paper shows that condominium price appreciation is significantly below the appreciation of single family houses in seven of the eight areas examined, which represents 80% of the sample. Valley wide regressions were then conducted utilizing geographic dummy variables for the individual analysis areas. These models indicate a strong premium for units of both housing types located in the downtown area.
Further Developing NPV Analysis to Evaluate Real Estate Investment Opportunities
C. Walker Collier III
Thesis supervisor: David M. Geltner, Professor of
Real Estate Finance
The primary objective of this thesis is to link the theoretical concepts of the broad academic community to the practice of the real estate industry. The most fundamental focus of this work is to build upon widely used net present value methodology in an effort to analyze real estate acquisition and development investments in a more rigorous manner. The main premise on which this paper is based is using risk-adjusted opportunity costs of capital to discount cashflows of varying levels of risk.
The cases presented in this paper are included to illustrate the usefulness of the methodologies to evaluate real estate investments; thus, more attention should be given to the methodology than the results of the analysis.
The methodologies presented in this paper seem to hold up quite well when apply to realworld cases. To understand the true usefulness of these methodologies it would be helpful to apply these methodologies to a wide sample of real-world deals.
The Market for Self-Storage in Greater Boston: An Analysis of Facilities, Management and Potential
Dustin J. DeNunzio
Thesis supervisor: William C. Wheaton, Professor
of Economics
The core objective of this thesis was to undertake a comprehensive study of the Boston-area self-storage market and determine where and what to build in order to achieve the highest profitability. The study begins with a preliminary look at the history of selfstorage in the United States and an analysis of the facility and market characteristics of the national self-storage industry. Then, using first-hand data accumulated through site visits, fifty local self-storage facilities in thirteen cities are analyzed. Statistical measures, including hedonic regression analysis, show the particular facility and management characteristics that affect the price per square foot that can be charged for storage unit rents.
Based on information regarding national rent and occupancy levels and the field data gathered on local facility and management quality, this study concludes that the market for self-storage in the Boston-area is still young and largely underserved. The regressions showed that population density and closer distances to the Boston central business district tended to yield higher rents per square foot. Additionally, for certain sized units, the quality of security and availability of climate control were significant factors in determining price. While the data identified the most significant variables included in price per square foot for the properties surveyed, the management and facility ratings provided the most important insight into the market. Most of the facilities and managers surveyed received sub par quality ratings. These quality ratings show the current inefficiency in the Boston self-storage market and, along with some favorable market factors, show opportunity for development.
Multi-round Auctions for Institutional Real Estate Assets: Theory and Practice
J. Aidan Foley
Thesis supervisor: William C. Wheaton, Professor
of Economics
The theory of auctions has grown dramatically
over the last four decades; it offers guidance
and insights into the conduct of efficient
and optimal auctions in real estate, and
other industries. In this thesis an auction
process used to sell institutional real
estate assets in the US is identified.
This auction came into being during the
1990s, and is now in common use. The auction
is recorded though surveys with industry
representatives and is characterized. Problems
with the auction are identified, and solutions
are proposed, referencing this auction
to the body of auction theory. The auction
consists of two rounds of sealed bid submissions,
with attrition in the number of competitive
bidders. After competitive bidding is complete
a preferred bidder is selected, and engages
in due diligence, a practice that often
uncovers new information and induces renegotiation.
Bids are not binding during the bidding
process, because the auction is informationally
incomplete. Sellers analyze bids based on the
perceived quality of the bidder as a
contractual partner, as well as the bid's
value, complicating the objective selection
of the best bidder. The auction is bilaterally
incomplete and unstable, potentially influencing
efficiency and optimality. Recommendations
to improve the process are made. Descriptive
statistics are formed and presented of
multi-round auctions for institutional
real estate assets.
Real Estate Opportunity Funds: Past Fund Performance As An Indicator Of Subsequent Fund Performance
Cathy C. Hahn
Thesis supervisor: David Geltner, Professor of Real
Estate Finance
The returns of opportunistic real estate private equity investment funds were tested for evidence of performance persistence between subsequent funds by the same manager. Tests include regression analysis, construction of contingency tables, and calculation of rank correlation coefficients. Tests were based on return data from the period 199 1 to 200 1 and were similar to those used to analyze performance persistence in other investment vehicles such as mutual funds d s and hedge funds.
Results indicate that manager performance in a given fund is a significant indicator of performance in subsequent funds, but that this persistence accounts for only a limited portion of d return. Gross fund returns exhibit a higher degree of serial correlation than net returns. Other fund characteristics, analyzed in conjunction with previous fund performance, are not shown to be significant indicators of performance.
Master Lease & Leaseback of Government Owned Real Estate: A Model for a Fixed Income Investment Product
Jeffrey E. Hutchinson
Thesis supervisor: David Geltner, Professor of Real
Estate Finance
Throughout the United States, significant taxpayer capital is unnecessarily tied up in the ownership of state and municipal government buildings. Today, multiple state and municipal governments face record budget deficits, and are struggling to find ways to raise revenues and decrease annual operating costs in order to close these budget gaps. At the same time, substantial amounts of investor capital from both public and institutional funds, as well as private investors, sits idle, as there is a lack of opportunity for safe, moderate-return long-term investments in today's markets.
This thesis investigates the benefits and drawbacks to an investment structure, similar to the commonly used corporate sale-leaseback, that can be used to free capital that is tied up in existing government owned real estate, while allowing governments to retain long-term ownership of these assets. It also presents the methodology for syndicating these investments into rate-able fixed income products, similar to municipal bonds or CMBS. These investments and the associated participation instruments create arbitrage opportunities for underwriters and syndicators of Government Lease Backed investments, and generate capital flows in the tens of billions of dollars.
The models presented may be applied to federal, state and municipal government assets alike. However, this thesis focuses on the application of the models to assets owned by the State of California, as it currently has one of the most significant budget crises in the country, as well as the largest state-owned real estate portfolio.
Volatility: A Statistical Comparison Between the Secondary and Primary Home Markets - The Lower Cape's Volatility and Average Return Compared to Three Boston Area Primary Markets
Craig Knight
Thesis supervisor: Dr. Henry O. Pollakowski, Visiting
Scholar, Center for Real Estate
This thesis attempts to analyze the long-standing perception that the secondary home market, homes built in and around vacation areas, is more volatile than the primary home market. For the first time, this study measures the volatility of a secondary home market, the Lower Cape. This markets volatility and average return are then compared with three primary housing markets in Boston's Metropolitan Statistical Area.
In order to compare the volatilities and average returns among the markets, a price index for Lower Cape Cod was estimated by applying the repeat sales regression technique to sales transaction data from the Warren Group. The Case, Shiller, Weiss zip code price indexes for the Boston area were used for the comparison primary markets.
The results from the study suggest that the secondary market is not more volatile than all primary markets. In fact, from these findings it appears that secondary markets have very similar volatilities and average returns to primary markets within 10 miles of the economic center of the region. This study finds that the Lower Cape was less volatile and had lower average returns than the market region within five miles of downtown Boston. The study also demonstrates that the Lower Cape's housing market is highly correlated with Boston's market and appears to lag behind Boston's market by one year.
Chain Hotels versus Independent Hotels: An Analysis of Branding, Room Revenue & Volatility
Tyler J. Langlois
Thesis supervisor: William C. Wheaton, Professor
of Economics
This thesis analyzes the historical performance of chain-affiliated hotels and independent (non-affiliated) hotels with an emphasis on the volatility of room revenues. The thesis attempts to prove or disprove the hypothesis that chain affiliated hotels are less volatile than independent hotels.
The findings of this thesis conclude that chain affiliated hotels have historically been less volatile than independent hotels. The lower volatility exhibited by chain hotels is due primarily to a lower volatility in room rate; the difference in occupancy volatility is not as evident.
This thesis also considers the months since September I 11th 2001 and confirms that volatility for both chain and independent hotels has increased. While longterm trends suggest otherwise, data suggests that for a period following September 11th, independent hotels were actually less volatile than chain hotels. This short-term result is expected to revert to long-term trends over time.
The Case for Pension Plan and University Endowment Equity Investment in Brownfields in the Urban Core of Major Metropolitan Areas
Tamara C. Larsen
Thesis supervisor: William Shutkin, Lecturer, Department
of Urban Studies and Planning
The purpose of this thesis is to present a case for institutional equity investment in brownfields in the urban core of major metropolitan areas. Pension plans and university endowments are the primary institutional investors focused on in the study, due to the implied obligation to seek economic and social returns associated with their investments.
The thesis will discuss primary forces that have historically limited institutional investment in brownfields in urban core communities as well as recent demographic and market trends in brownfield redevelopment and institutional equity investment in real estate. The thesis will include an analysis of two case studies, and implications for future trends in institutional equity investment in underserved communities in the urban core of major metropolitan areas.
The Value of Flexible Design: Real Estate Investment and Development Strategy Under Uncertainty
Benjamin A. Loomis
Thesis supervisors:
David Geltner, Professor of Real
Estate Finance, Center for Real Estate
William L Porter: Professor of Architecture& Planning,
Department of Architecture
Utilizing recent research into bulling life cycle analysis and option valuation theory, this thesis develops an architectural methodology for analyzing buildings"capacity for change," and economic models for valuing this capacity. Together these can be used to evaluate strategies for the design, investment, and development of new and existing buildings
Two hypothetical case studies illustrate the methods and models, and produce results which challenge conventional wisdom. One case study suggests that including a redevelopment option can increase the valuation of moderately performing assets by up to 25% over conventional discounted cash flow analysis, even when redevelopment is not economically feasible in the near term. The other case study finds that when zoning allows, the design and construction of a building which can flexibly switch between multiple uses can be economically viable, even when substantial additional costs are incurred.
Factors Influencing German Private Equity Investment in US Real Estate
Kay L. Paelmo
Thesis Advisor: David Geltner, Professor of Real
Estate Finance, Center for Real Estate
This thesis identifies and ranks in order of importance the key factors influencing high net-worth German investors' decisions about US real estate private equity investments. Through research and in-depth interviews with key clients and investment advisors of Taurus Investment Holdings, LLC, each factor is examined based on available data and is ranked in a significance hierarchy according to client responses. Interview results indicate that "Higher Expected Returns in US Real Estate,'' "Trust in the Investment Advisor/Company," and "Diversification" are the three most influential factors for investor decisions about US real estate investment. Investors reported that exogenous factors such as German and US tax laws, US economic/political climate, and currency exchange rates are not as important. However, these exogenous factors are intimately linked to the more personal factors: both rational (Higher expected returns in US real estate, Diversification benefits) and emotional ones (Trust in the Investment Advisor). Furthermore, investors' decisions to invest in US real estate is crucially dependent on their trust in the investment advisor, regardless of high promised returns or diversification benefits. In a global recession where the sagging US economy and the weakening US dollar have eroded the returns for German investors with US real estate investments, the element of trust is more important than ever. A carefully chosen US investment advisor / partner plays a critical role in accomplishing investment objectives and achieving optimal results for German investors.
How Different Home Styles Are Valued in the Salt Lake City Market
Barrett Peterson
Thesis Supervisor: Henry 0. Pollakowski, Visiting
Scholar, Center for Real Estate
This thesis focuses on market valuation of attributes of single family housing in the Salt Lake City market. Using data from different sub-regions of Salt Lake County, this paper addresses the question of buyer demand with respect to home style. Using hedonic regression analysis, the thesis explores the premium or discount associated with different styles of homes. Analyzing the hedonic results in the context of the current housing stock in the Salt Lake Area provides interesting insights into how rambler, two-story, split entry and tri-level homes are valued. The hedonic model shows that buyers pay a premium for ramblers across the different sub areas of Salt Lake City. Given this premium, the thesis explores what the optimal mix of home style might be in the two areas where considerable developable land remains.
Thinking Outside the Big Box? Retailers Look to America's Inner Cities
Adrian S. Quackenbush
Thesis Supervisor: John T. Riordan, Chairman, Center
for Real Estate
Recent studies have shown there is a considerable retail opportunity in established but historically underserved markets in the United States. The goal of this thesis is to investigate to what extent national big box retailers are entering historically underserved markets in America's inner cities. This thesis will study the reasons for retail in underserved markets, determine to what extent retailers are willing to change their prototype formats to enter these markets and determine what measures must be taken by retailers and developers to allow for success. Six case studies will analyze recently completed and proposed projects where big box retailers entered urban markets.
Mill And Mercantile Conversions: A Case Study Analysis of Residential Adaptive Re-Use Projects
Zach E. Schaumburg
Thesis Supervisor: Peter Roth, Lecturer, Department
of Architecture
The demand for housing, both affordable and market rate has remained high, particularly in dense urban areas. This thesis will consider the conversion of mill or mercantile buildings to urban lofts or condominium residences. First, a brief overview of the housing market, supporting demographics, and current trends is provided including a discussion of market driven design, size, layout, and amenities common to these urban residences.
Three case studies are used as a qualitative tool to analyze the successful conversion of these types of buildings. Analysis will consider physical dimension, building structure, capital structure, and project costs, including acquisition, development, and construction cost data. Tax or other incentive programs are discussed when applicable to project feasibility and developer returns identified when possible for a relative comparison.
The case study analysis will attempt to provide practical information to developers considering similar conversion projects. The information will identify conditions and inherent problems that prevail in these buildings and will provide a general context for conversion feasibility analysis.
Density Bonuses and Affordable Housing in California: Examining the Economic Impact on Three Cases
Kevin Skiles
Thesis Supervisor: David Geltner, Professor of Finance
The State of California faces a shortage of housing in many of its urban and suburban communities. This shortage has led to increasing home prices and there has been growing citizen demand to address housing affordability. The California State government recognized in 1992 that incentives were needed to stimulate the development of both housing that was designated for low-income residents and housing that was priced at market rate. The government understood that any law that acted as a further exaction on private developers would be counterproductive to their goals and thus adopted a density bonus program, to be implemented by local planning authorities, with the creation of California Government Code Sections 6591 5 through 6591 8.
The paper will use three case studies to analyze the law's effectiveness as an incentive to private developers. By understanding the impact of the density bonus on individual projects, we will be able to make detailed insights into what is successful and what problems exist with the current program.
REIT Here, REIT Now. Should the UK Consider the Introduction of a REIT-Style Vehicle?
Nicholas A Spencer
Thesis Supervisor: David Geltner, Professor of Finance
This thesis investigates a number of the issues currently pertaining to the introduction of a UK Real Estate Investment Trust (REIT) vehicle. It uses a combination of qualitative and quantitative studies to evaluate whether the UK government should investigate and pursue this form of property equity securitisation. The report is split into three parts.
The first describes the history of the UK securitisation lobby and investigates the theory and characteristics of the US REIT vehicle. It describes similar vehicles used throughout North America, Europe, Asia and Australia with specific regard to their varying restrictions and regulations.
The
second section uses Modem Portfolio Theory
to examine the benefits of a securitised
property vehicle within a mixed asset portfolio.
The exercise tests the theory that the
UK Public Limited Company is at a disadvantage
to the American REIT and the Australian
Listed Property Trust. Finally, an American
REIT and an American C-Corporation are
compared in a valuation
exercise to assess the magnitude of
the US REIT's tax benefits.
The final section draws from the previous analyses to present a qualitative discussion of the key arguments with regard to different participants in the UK property market. In conclusion, it considers the pros and cons of a UK REIT vehicle in light of current UK macro-economic issues.
Default Study of Commercial Mortgages in CMBS Pools: An Empirical Analysis of Defaults and Loss Severity
Rohit Srivastava
Thesis Supervisor: William C. Wheaton, Professor
of Economics
The commercial mortgage backed securities ("CMBS") market has become a major source of real estate financing over the last 10-12 years. The growth of this market has been accompanied by strong real estate fundamentals. Consequently the collateral in the CMBS pools has not seen a major real estate recession till now. The loss assumptions used by market participants is based on the experience of banks and insurance companies ("Portfolio Lenders"). As the underwriting criteria and the collateral quality in the CMBS market is markedly different than that of the Portfolio Lenders', it can be assumed that the loss experience is going to be different as well. The loss experience for a portfolio is determined by two main factors, the frequency of defaults (or delinquencies) in the pool and the actual severity of loss on the defaulted loans. Each defaulted loan in a pool represents loss severity and eventual yield degradation. As Real Estate is a lagging indicator, historically, every economic downturn has been followed by a surge in default rates. The recession of 200 1-03, which appears to be no different from its predecessors, is also indicative of possible rising commercial mortgage default rates. With further alleviating political risks and no signs of economic recovery in sight, concerns run high investors regarding rising delinquencies and default rates. It is time again, to evaluate the potential yield degradation for truer reflection of the credit risk in the pricing of the CMBS.
In an effort to empirically quantify the credit risk and the economic cost of the losses on a portfolio basis, this study examines 801 CMBS deals with 78,680 commercial mortgage loans originated from 1960-2003, tracking them through to June'2003. The effort is focused on evaluating performance of this portfolio, which is mainly representative of mortgages originated by "conduit" lenders. These loans originated mostly with the intention of immediately selling through securitization rather than holding on balance sheet are truly representative of the majority of today's CMBS collateral. The study further examines the possibility of different variables like Debt Service Coverage Ratio, Loan to value, Metropolitan Statistical Areas location and economic growth, impacting the performance of commercial mortgages. This evaluation is based on empirical analysis of this data collected by Intex.
The methodology adopted entails a review of the defaulted loans based on factors such as origination cohorts, geographical distribution of defaulting properties, loan sizes, seasoning period, timing of default, number of loans by originator and year, severity of loss, foreclosure process and defaults by property types. Analysis of the different variables helps provide insight into the relationships and importance of these factors in the eventual economic loss or the impact on the imputed yield.
Opportunities and Obstacles for US Investors in Moscow; Office Market Comparative Return Study
Alexander V. Stolyarik
Thesis Supervisor: John T. Riordan, Chairman MIT
Center for Real Estate
Moscow in recent years has seen significant changes in the amount of investment grade office space. In the period before the financial crisis of 1998, in which Russia defaulted on its debt and the ruble was drastically devalued, many foreign investors saw great opportunity in the Moscow office market. What attracted foreigners then was the scarcity of suitable space for many foreign companies looking for offices in Moscow and the changes taking place in Russian law concerning ownership of land and real property. With the advent of the 1998 crisis the interest of foreigners waned, but that of cash-rich Russian companies and individuals, principally from the natural resources sector, grew in intensity. Since then and for myriad reasons that I shall examine in this study, Russian investors appear to have successfully held the foreigners at bay.
Just what advantages do the Russians continue to have over foreigners other than their opportunistic entry post 1998? How are these advantages measured in risk-adjusted terms? What is the source of these advantages? Are they likely to be sustained to the point that foreign investors will be reluctant to compete in Moscow's real estate market?
Using US investors as an example, this study seeks to find answers to these questions and, to a modest extent, forecast near-term returns while describing risks involved in the emerging Russian economy.
Real Estate Private Equity: An Overview of the Industry and Analysis of Its Returns
Stephen M. Tang
Thesis Supervisor: David Geltner, Professor of Real
Estate Finance
The real estate private equity / opportunity fund sector has experienced tremendous growth as a result of regulatory and market changes. With this growth come the pains and opportunities of restructuring the capitalization of a capital-intensive industry. While the underlying assets of real estate opportunity funds are different than traditional private equity funds, many of the issues facing emerging real estate funds are similar to the issues faced by traditional private equity funds.
As the industry continues to grow, many issues facing these opportunity funds will be intensified as the early pioneer funds start to exit their investments and realize returns to the limited partners. As the data analysis in this thesis indicates, the significance of the fund performance has very little correlation to date with any specific property sector as illustrated with the low R-square and t-Stat statistics related to the regression analysis. For the most part, very few consistent patterns have emerged in the industry with the exception of higher volatility in smaller funds and the importance of manager selection when it comes to investing in the right fund as evidenced by the wide range of performance returns within similar initial vintage year categories.
The industry is maturing towards greater efficiency and transparency along with the broader private equity industry. It appears likely that alternative investments such as real estate opportunity funds as an investment alternative are here to stay. Not only does private equity align the interests of investor and manager but it also provides superior returns to the investor compared to the traditional fee-manager model that used to predominate property investments. The real estate industry, which represents fifteen percent of the U.S. GNP, is poised for continued growth. Moving forward, real estate private equity is well positioned to grow as well as it complements the public equity markets that help to improve the overall capital structure of the industry.
The Growth of
Retail RElTs
An exploration of current practices and
implications
A. Eric Toth
Thesis Supervisor: John T. Riordan, Chairman, MIT
Center for Real Estate
This study is an exploration of the current growth activity of retail real estate investment trusts (REITs). The specific questions to be explored are: How are retail RElTs currently growing, how is this growth being financed and what are the implications of these choices on the retail sector and individual REITs?
This paper begins with a general overview of RElT specific characteristics and the retail sector that serves as background information to the data analysis found in the second part of this work.
The author hopes that this thesis is of interest to RElT investors, managers, analysts and anyone else who might be curious about the current state of the retail RElT industry.
Micro-level Return and Volatility Drivers in Boston's Single Family Home Market
Jay Valenta
Thesis Supervisor: Henry O. Pollakowski, Visiting
Scholar, Center for Real Estate
Developers and investors commonly target neighborhoods close to the urban core and with low median incomes as potential growth markets. Investments in these areas however are often perceived by private sector capital as being high risk and low return. An understanding of the predictors of investment volatility and return is critical to investors and homeowners who wish to maximize investment returns and portfolio growth. Moreover, for mortgage lenders who are obligated to invest in a wide spectrum of communities, volatilities in house prices may affect the distribution of their collateral values, the probability of default, and the profitability of lending in certain areas.
This paper addresses the following questions: Does appreciation return and volatility in metropolitan house prices vary significantly among zip code areas? Can the variation in appreciation return and volatility among these areas be explained by additional data?
This paper uses appreciation and volatility statistics calculated from a repeat sale index of house prices in metropolitan Boston compiled biannually by Case Schiller Weiss (CSW) as well as data gathered from the 2000 U.S. Census and the 1997 Economic Census.
Returns in China Residential Development Projects - A Practical Investment Evaluation Procedure Developed for the Analysis of Chinese Residential Development Projects Based on Modern Financial Economic Norms
Qian Wang
Thesis Supervisor: David Geltner, Professor of Real
Estate Finance
Since late 1990s, Chinese real estate has been
experiencing rapid growth, especially in
the commercial housing sector. This phenomenon
is mainly supported by China's housing
privatization policy implemented in the
mid-1990s and its strong GDP growth for
the past 15 years. Chinese citizens are
now able to purchase their housing units
directly from the market with financing
offers from major domestic banks. These
days, real estate development-residential
development in particular-is perceived
in China as one of the proven vehicles "to
get rich overnight." An increasing number
of companies, including some large international
real estate developers, are participating
in the Chinese real estate development
market. New players entering the market
have been escalating the competition, which
requires real estate developers to be highly
objective and practical when evaluating their
residential real estate development
investments.
After describing and criticizing the current methods of calculating residential real estate development returns in China, I argue in this thesis that, based on modem financial economic norms, a practical investment evaluation procedure can be developed for analyzing Chinese residential development projects.
The new procedure is a practical application of a fundamental principle in finance: the NPV investment decision rule. This rule requires that, in order to make sound investment decisions, investors should maximize the NPV across all mutually exclusive alternatives and never choose an alternative in which NPV<O. The new real estate development investment evaluation procedure encompasses four steps: (1) projecting cash flows; (2) calculating the present value of the stabilized property; (3) calculating the present value of total development costs; and (4) calculating the expected return on development investment, or calculating the maximum land purchase price.
I use the Hainan Luxury Vacation Home Development in Haiikou, Hainan, China, as case study to demonstrate the fundamental differences between current practices and the proposed procedure. My intention is to thoroughly clarify how applying the NPV rule takes into account some of the unique features of real estate development investments, such as time-to-build, intensive use of debt financing, and phased risk regimes.
In the final part of the study, I conclude that current practices of real estate development return calculation fail to reflect these unique features of development investments. With the application of the NPV rule, the proposed financial procedure makes real estate development evaluation analysis more practical. The new procedure is a simple yet powerful financial analytical tool that enables developers to comprehensively exam the expected return on their development investments. I also recommend that, because the procedure is based on fundamental principles of modem finance, it should become the standard way of evaluating real estate development investments.
On the Waterfront: A 25 Year Study of the Relative Risk & Return of Florida Single-Family Waterfront and Inland Homes (1977-2002)
Forrest A. Westin
Thesis Supervisor: Dr. Henry O. Pollakowski, Visiting
Scholar, Center for Real Estate
This study applies the classic capital markets risk/return relationship-the riskier the investment, the greater the expected return-to the single-family home market. Treating coastal waterfront property as a unique asset class, its investment performance is measured and compared with that of inland property to determine the potential existence of a "mispricing" in the home market. Using single-family home transaction data from four coastal Florida counties, this thesis uses a repeat-sales regression technique to estimate annual home price changes and to construct home price indices for the period 1977-2002. The resulting price indices show a higher average annual appreciation rate for waterfront homes relative to inland homes; the highest waterfront price appreciation occurred over the period 1997-2002. The results also indicate that waterfront homes in two of the four study counties experienced higher average price appreciation at lower levels of risk than the inland homes. This finding indicates a potential "mispricing" of waterfront homes.
An Investigation Into The Valuation Behavior of Land Developers and Appraisers
Elizabeth Brooke Wolff
Thesis Supervisor: David Geltner, Professor of Real
Estate Finance
The goal of this thesis is to investigate the real world problems associated with valuing a key component of real estate -- raw land. Because land valuation is seen as a risky endeavor that requires investors to make decisions based on outcomes that are uncertain, it offers a unique and interesting realm for evaluating human decision-making behavior.
Through contrasting the three different decision processes of 1) the normative approach to valuation that appraisers are trained to employ 2) the true valuation behavior of appraisers in the field, and 3) the true valuation behavior of land developers in the market place, this study seeks to gain insight into real estate valuation behavior.
The hypotheses for this thesis are drawn from the core theories of decision analysis and cognitive psychology. Because this study looks at the process of valuation, it focuses on the cognitive shortcuts, formally referred to as heuristics, that humans use to make decisions in complex situations where the outcome of a task is uncertain.
In this study, a process tracing technique was employed to study the problem solving behavior of nine land developers and ten appraisers. To compare subject processes, protocols were conceptualized as frequency distributions and were compared using Kolmogorov-Smirnov goodness-of-fit tests as well as parametric tests of equal population proportions.
The results of the tests showed that according to a model developed by the Appraisal Institute, appraisers and developers behave in a non-normative manner for they take certain cognitive shortcuts that end up altering this model when valuing an asset. The information search behavior of appraisers and developers was also found to be observably different. Further investigation discovered that appraisers look at more comparables than developers, while developers tend to be more interested in incorporating valuation steps that are not prescribed by the normative model.
The findings of this study lead to serious questions about the efficacy of the AI's current model. In fact, the deviations between appraisers' methodologies and those of the market, as represented by the developers tested, were such that if these discrepancies are not addressed the work of appraisers risks becoming marginalized. Implications for future research were also discussed.
Rent Adjustment Mechanism for the Multifamily Housing Market
Lee-Young Yun
Thesis Supervisor: Henry Pollakowski, Visiting Scholar
of Real Estate Economics
This study has analyzed the rent adjustment mechanism for the multifamily rental housing in the US during the period 1993-2003 for twenty-four US metropolitan areas. The rent adjustment model employed incorporates the principal argument of search theory that vacancy ultimately determines rent levels. Various time lags on the vacancy rate are tested for each metropolitan area in order to better understand the timing of the effect of the vacancy rate on market rents and to find the best fitting model for each metropolitan area. Two kinds of rents are analyzed : the CPI (Consumer Price Index), 'sitting tenant rent' actually paid by the tenants, and MPF (Market Product Fact), the 'asking rent' for the vacant unit.
The results of this study clearly indicate that the rent adjustment models under study explain the MPF rent adjustment mechanism better than the CPI rent adjustment model. Chaning the vacancy lag does not improve the CPI rent adjustment mechanism. The results of this study suggest further studies to explore the behaviors of lessors and lessees to explain why CPI rents behaves as they do.
The findings identified through this research provide a helpful basis for advancing an improved theoretical and empirical formulation that highlights the complexities of the rent adjustment process. From a practical point of view, the results can help real estate investment analysts to better model and forecast rent changes in residential real estate market.
Industrial Property Performance and Building Functionality
Yajie Zhao
Thesis Supervisor: William C. Wheaton, Professor
of Economics
This paper uses statistical regression techniques, Ordinary Least Squares (OLS), to develop models to explain the relationship between physical characteristics and performance of industrial properties. The physical characteristics studied in this paper include building size, building age, building type, and tenant type. Rent and occupancy rates are used as a proxy for performance.
The results show that building size, building age, building type and tenant type are significant variables in the explanation of industrial property performance and volatility of annual growth of performance, but these variables are not found to exert a significant influence on the long-term trend of performance.
The results also indicate that the decrease in size of industrial properties increase their performance (or the relationship is negative) but decrease their volatility of annual growth of performance (or the relationship is positive); medium-age industma1 properties outperform newer and older ones in both performance and volatility of annual growth of performance; R&D industrial properties have the best performance and also the highest volatility of annual growth of performance among the three building types: manufacturing, warehouse, and R&D; single tenant industrial properties have better performance and higher volatility of annual growth of performance than multitenant ones.
