Thesis Research
2006 Theses
Following are a selection of theses abstracts by members of the Class of 2006. Join MITREX (The MIT Real Estate Exchange) to download complete theses. For non MITREX members, theses can be purchased from the MIT Libraries.
Evaluation of Large-Scale Industrial Development Using Real-Options Analysis
– A Case Study –
Tatusyuki Ariizumi
Abstract
RE-THINKING HIGHEST AND BEST USE: IMPLEMENTING SMART DEVELOPMENT IN SUPPORT OF SMART GROWTH. A Case Study in Santa Fe, NM
Jennifer K. Balkcom
Abstract
The M.I.T. Endicott House A Study in Highest and Best Use
William C. Bolstad
Abstract
Buying Green
William B. Bradshaw II
Abstract
Assessing the Feasibility of Establishing a Publicly Traded Global Real Estate Fund Domiciled in the Cayman Islands
Scott Butterfield
Abstract
Real Estate Investment Indices in Japan and Their Role in Optimal International Portfolio Allocation
Takashi Endo
Abstract
REAL ESTATE PRIVATE EQUITY: STRUCTURING THE U.S.-BASED OPPORTUNITY FUND
Ryan J. Haas
Abstract
Opportunities and Obstacles for Foreign Investors in Turkish Real Estate
Hasan Halkali
Abstract
Developing a Total Replacement Cost Index for Suburban Office Projects
David John Hansen
Abstract
A Study on Real Estate Derivatives
Jong Yoon Lim
Yi Zhang
Abstract
THINK INSIDE THE BOX: AN ANALYSIS OF CONVERTING COMMERCIAL PROPERTY INTO SELF STORAGE FACILITIES
Sean Jeffrey McKinley
Abstract
Innovative Topics in Structural Engineering and Real Estate Development: Blast Resistant Facades & Incentives for Large-Scale Smart Growth Development
Abraham Menzin
Abstract
REDEVELOPING GREYFIELDS: DEFINITIONS, OPPORTUNITIES AND BARRIERS
Amy W. Merritt
Abstract
An Analysis of Investor Types in Real Estate Capital Markets: Their Behavior and Performance from 2000 to 2006
John Harris Morrison III
Abstract
“FOR GOOD DESIGN, YOU PAY NOW. FOR BAD DESIGN, YOU PAY LATER.” – OR DO YOU?
Meena Murugappan
S. Michael O’Young
Abstract
The Central City: Why the Comeback?
Scott Nguyen
Abstract
THE AMBIVALENCE OF GENTRIFIERS
Alison Elizabeth Novak
Abstract
Stocks Are From Mars, Real Estate Is From Venus: An Inquiry into the Determinants of Long-Run Investment Performance
Arvind Pai
Abstract
The Value of Contractual Terms in Office Leases
Kevin T. Sheehan
Abstract
The Process of and Barriers to Environmentally-Oriented Real Estate Development: Examining the Role of Organizational Structure, Project Delivery Methods and Contracts in Low Impact Development
Charu Singh
Abstract
Uncommon Ground: Property, Coordination, and Rebuilding New Orleans
Paul Stewart
Abstract
Improving Real Estate Project Delivery in Malaysia: Analysis, Comparison and Selecting the Best Method
Yew Chin Tan
Abstract
The Application of Simulation to Project Evaluation for Real Estate Developers in China
Yongchun Tian
Abstract
Building on Lessons Learned: Too High Hopes Without HOPE VI?
Kristen J. Wang
Abstract
Seasonality in Commercial Real Estate Transaction Volume and Capital Returns
Xiaohu Wang
Abstract
WHAT HAPPENED TOTHE THREE-DECKER?
JACOB WEGMANN
Abstract
Understanding the Value of Boutique Hotels
Daniel F. Wheeler, IV
Abstract
Brownfield Financing in the United States: From Social Benefit-Cost Perspective
Rongtao Xu
Abstract
County Regulation of Large Scale Commercial and Industrial Real Estate Development in the Southwest: Is It Effective?
Barrett Elizabeth Yates
Abstract
County Regulation of Large Scale Commercial and Industrial Real Estate Development in the Southwest: Is It Effective?
Barrett Elizabeth Yates
Abstract
Evaluation of Large-Scale Industrial Development Using Real-Options Analysis
– A Case Study –
Tatusyuki Ariizumi
Advisor: David Geltner,
Professor of Real Estate Finance, Department of Urban Studies and Planning
Recently, real-option analysis has gained attention as an innovative valuation method for
complex real estate projects. However, considering its potential, this method has not become as
popular as it should have. One major reason may be its complexity, and perhaps, its effectiveness is
not yet widely known in the industry.
Accumulating high-quality case studies can help demonstrate the effectiveness of any
theory. Case studies can also help standardize the application process, providing guidelines that
help people use the model more easily. In addition, it can reveal and provide solutions for various
types of properties, and the means to accommodate the specifics of real-world problems met while
applying the model.
This case study deals with a large-scale industrial development project, which is suitable
for the application of the real-option model. Usually industrial developers obtain large sites and
then develop them in a phased manner. This allows them the freedom to choose phase timing and
to modify their initial building plans more freely than with other types of property development.
This flexibility adds certain amount of value to the land.
We found that, with some modifications, the real-option model is fairly effective when
applied to large-scale industrial development. The model facilitates more precise valuations of
land by taking into account various options, such as waiting for better timing and selling the vacant
land as is. This study also offers a method to analyze the proper timing of each phase’s
commencement—a useful decision-making tool for the developer.
RE-THINKING HIGHEST AND BEST USE: IMPLEMENTING SMART DEVELOPMENT IN SUPPORT OF SMART GROWTH. A Case Study in Santa Fe, NM
Jennifer K. Balkcom
Advisor: John Kennedy, Lecturer, Center for Real Estate
This paper answers the questions “where to develop?”, “for whom to develop?”, and “what to
develop?” from a double bottom line perspective of profit making and social benefit, using a 3-
acre property in Santa Fe, NM as an example. The first section on where to develop gives a
literature review of the costs and benefits of urban growth and generates the types of questions
to ask when determining appropriate development location from a smart growth, double
bottom line perspective. Using this framework it is determined that four of the top priorities for
development in Santa Fe are affordable/moderate income housing, water conservation,
greenhouse gas reduction, and compact/infill development. Section two considers who the best
target market is for development, using demographic data and GIS maps from the 2000
Census, as well as statistics from local Santa Fe government and think tank sources, and finds
that housing for the population between 100-120% of area median income is a significant
unmet need. Section three begins to determine what to develop for this population, while
addressing the remaining policy priorities for the city of water conservation, compact
development, and greenhouse gas reduction, and presents a preliminary cost analysis for a
passive solar green built house. Preliminary results reveal that the green cost premium is an
additional $6,743 over the cost of a traditional house, but this does not include the associated
reduction in utility bills resulting from a passive solar design. A preliminary analysis of the costs
and benefits of installing a photovoltaic system is included as well, and a feasibility analysis
suggests that building a passive solar adobe house with photovoltaic system is feasible if a
variance is granted to put at least 3 houses on the 3-acre subject property, which is currently
zoned for one house. The conclusion makes suggestions for program evaluation measures, to
evaluate success at not only profit making, but the double bottom line of achieving social
returns as well.
The M.I.T. Endicott House A Study in Highest and Best Use
William C. Bolstad
Advisor: Brian A. Ciochetti, Thomas G. Eastman Chair and Chairman, Center for Real Estate
Since the 1950’s, the Massachusetts Institute of Technology has been in possession of the
Endicott House, a 19-acre property and former family estate located in Dedham, MA. A highest
and best use analysis was performed on the subject site in an effort to determine which of several
potential uses would yield the highest potential profit. Three major scenarios including selling
the property as it exists currently, subdividing it and selling vacant lots for single-family homes
and subdividing the property, constructing single-family homes and selling them were examined.
Values for differing scenarios were derived in several ways, making sure to use the appropriate
methods for each. These methods included discounted cash flow analysis, the sales comparison
technique and assessed value to actual sales price ratio approach. In general, costs for scenarios
involving the improvement of real estate were derived with the assistance of a development
company with over 25 years of experience and specializing in the construction and sale of single family
homes and planned communities.
When estimated costs and expected sales returns were compared, a maximum development
alternative was found to generate the highest potential profit. This scenario, which entailed the
demolition of the majority of existing facilities and the construction of 14 new single-family
homes, resulted in a projected value of $27.2 million by 2010.
Research was also conducted on the market potential for development of senior housing facilities
at the Endicott House site. Analysis of a 272 square mile study area suggested that the greatest
opportunity in this housing market exists in the development of independent senior living units
and in dementia care facilities.
Suggestions for areas of further study were made.
Buying Green
William B. Bradshaw II
Advisor: William Shutkin, Research Affiliate, Department of Urban Studies and Planning
Second Reader: Lynn Fisher, Assistant Professor of Real Estate, Department of Urban Studies and Planning and the Center for Real Estate
Green development has received much attention over the past decade, with the greatest interest coming
from designers. However, the development and investment communities have been slower to adopt green
principles, and the author claims that this hesitancy is related to an information gap around the costs and
benefits of green building. When researchers do quantify cost or value differentials, they do it on a case
study basis. By focusing on a few extraordinary examples that are ultimately placeless, these case studies
create an information gap between the extraordinary performance of a few buildings (what is possible)
and the ordinary performance of a typical green building (what is expected). Through the development of
a simple real estate market model, the author argues that information on what is expected drives decision
making in real estate, and market-based studies that are segmented by place and product type would provide
more pertinent information to these industry players. If green buildings create greater value over a building’s
lifecycle, then green building owners should expect superior returns over time. However, no one has tested
this hypothesis for a particular real estate market with a large number of green buildings. To that end, the
author develops a methodology that could be used to complete such a study. This methodology is then tested
on the market for green single-family homes in the Austin, Texas metro area. The author finds that homes
rated as green by the Austin Green Building Program sell at a 9-10% price premium over unrated homes
(further research by the author has shown that this premium is likely related to a spatial concentration of
green homes in high cost areas and not due to the green rating).
Assessing the Feasibility of Establishing a Publicly Traded Global Real Estate Fund Domiciled in the Cayman Islands
Scott Butterfield
Advisor: Lynn M. Fisher, Assistant Professor of Real Estate, Department of Urban Studies and Planning
This thesis examines the feasibility of creating a publicly traded, synthetic REIT-type investment
fund for the purpose of investing in a portfolio of international real estate assets. The investment
strategy is driven by both an increasing supply of international real estate opportunities and an
increasing demand for international real estate investments. The fund will be domiciled in the
Cayman Islands, where it will benefit from a tax exempt status, limited regulations, and a well
established investment fund industry. The global investment strategy of a synthetic REIT-type
Cayman Islands fund is a novel investment strategy.
Because no standard investment structure for an international real estate fund exists, the analysis
will focus on creating a fund level and tier level structure in order to achieve certain defined
investment, tax, and regulatory objectives. These objectives include providing accessibility to a
broad range of investors, minimizing taxation, minimizing regulatory requirements, providing
market liquidity and transparency for shareholders, and targeting real estate investments in 40
countries. A primary focus will be on creating a tax-efficient tier structure for repatriating
income from real estate investments to the fund. The feasibility of the fund will be assessed
based on how successfully it achieves these objectives.
In general, the fund will have several competitive advantages over international REITs, REOCs,
and private equity real estate funds. The fund will not have to comply with various
organizational, asset, income, long-term debt, distribution, and foreign ownership rules that are
imposed on REITs in order to achieve a tax exempt status. REOCs are subject to corporate level
taxation and many REITS impose withholding tax on dividends to foreign investors. The fund
will be more tax-efficient because no such taxes will be imposed on the fund. The fund will
provide more market liquidity and transparency, to a broader range of investors, than private
equity real estate funds can provide. Additionally, since most REITs and REOCs are
domestically focused, the global investment strategy will provide greater portfolio diversification
benefits.
Real Estate Investment Indices in Japan and Their Role in Optimal International Portfolio Allocation
Takashi Endo
Advisor: David Geltner, Professor of Real Estate Finance, Department of Urban Studies and Planning
It has been said that “home bias” exists among investors due to informational disadvantage involved in
cross-border investment. But, real estate has become a major asset class and cross-border real estate
investment has been surging. Behind this phenomenon is heightened awareness among investors of the
modern portfolio theory and the benefits of diversification. Japan is not an exception. Since late 1990’s, a
large amount of capital has flowed into Japanese real estate markets. The markets have also experienced
significant transformation. However, in the eyes of foreign investors they are far from transparent due to,
among other things, lack of reliable investment indices of commercial real estate. Such indices cannot be
generated overnight, and lack of such indices can be a critical issue for global real estate investors. This
issue is contributing to under-investment in Japan’s real estate from overseas. Facing this problem,
researchers and industry practitioners launched a number of investment indices for private real estate in
recent years, each of which has strong and weak points. Compared to other indices, the ARES J-REIT
Property Index seems potentially the most reliable and promising index for Japanese commercial real
estate.
The purposes of this paper is to analyze and compare various investment indices for Japanese private real
estate; to understand distortions i.e. the “lagging” and “smoothing” effects involved in appraisal-based
investment indices to see the “true” pictures of private real estate returns; and then to apply such indices
to an international portfolio analysis to see the relative position of Japan’s private real estate as a global
asset class. Simulations are used to understand the mechanism of appraisal-based investment indices.
Introductory sections provide some background on globalization of real estate and issues with Japanese
real estate markets.
REAL ESTATE PRIVATE EQUITY: STRUCTURING THE U.S.-BASED OPPORTUNITY FUND
Ryan J. Haas
Co-Advisors: Lynn Fisher and David Geltner, Assistant Professor of Real Estate and Professor of Real Estate Finance
It has been estimated that over 150 real estate opportunity fund sponsors have emerged since the
advent of the so called “Real Estate Opportunity Fund” industry. The industry, now more than
15 years old, has experienced significant growth since its inception. As the real estate private
equity industry continues to mature and becomes more competitive, fund sponsors must ensure
that they are best in class in all facets of their business, and the structuring of their investment
vehicle is a perfect place to start.
The purpose of this paper is to identify the most important fund level structuring issues facing
real estate opportunity fund sponsors when raising a new fund. It begins by reviewing the
history of the real estate private equity industry, specifically real estate opportunity funds. The
study follows with a recounting of the industry’s standard legal, financial, and tax structures for
these funds. Finally, utilizing the results of a comprehensive industry survey and interview
process, the paper gives an update of the current industry practices.
After a thorough study, it is clear that a fund’s structure will largely be determined by the
investor makeup and the respective fund strategy. This fact implies that there can truly be no
”one-size-fits-all” best practice. While no particular new best practices were uncovered, the
results were very interesting, and they provide general guidelines for fund sponsors to follow
given a variety of different circumstances.
Opportunities and Obstacles for Foreign Investors in Turkish Real Estate
Hasan Halkali
Advisor: David Geltner, Professor of Real Estate Finance, MIT Center for Real Estate
This paper examines the Turkish real estate market from the viewpoint of foreign
investors contemplating entering into that market.
Since 2002, the government of Turkey has been implementing an aggressive economic
reform program within which, foreign direct investment (FDI) plays a crucial role. To attract
foreign investments, the government has instituted major reforms in tax and finance laws and has
provided incentives to develop many industries including real estate.
The underlying question this paper seeks to answer is: What factors make Turkey
attractive for foreign commercial real estate investors?
To answer this question, I examined the following factors: geopolitical situation, key
economic indicators, current state of and forecasts for Turkey’s real estate markets, applicable
laws, and requirements for establishing a business in Turkey.
The research method I utilized for this paper mainly involved literature review. Analysis
of government documents, industry reports, law journals, and audio recordings of papers
delivered at conferences revealed several factors that could affect the country’s real estate
markets.
Turkey’s political stability, favorable demographics, established financial structure,
increasing economic power, tight monetary and fiscal policies, favorable foreign and domestic
investment laws, and prospects for joining the EU make it an attractive target for foreign
investors. In contrast, Turkey’s large government debt, large external debt repayments, growing
current account deficit, and the possible devaluation of its currency present possible threats to the
country’s future economic prospects.
All things considered, Turkey is and should remain an attractive destination for foreign
investors in the next several years provided that the Government of Turkey continues to
implement the IMF-backed economic program and the process of structural reform necessary for
EU accession negotiations.
Developing a Total Replacement Cost Index for Suburban Office Projects
David John Hansen
Advisor: William C. Wheaton, Professor of Economics
Understanding the components of replacement costs for office developments, and how these
components combine to create total development costs is essential for success in office real
estate development. Surprisingly, the term “replacement cost” does not enjoy a standard
definition in the industry. This study explores the components of total replacement cost, and
ultimately creates a market-level index industry professionals can utilize when creating or
reviewing office development budgets.
A Study on Real Estate Derivatives
Jong Yoon Lim
Yi Zhang
Advisor: David M. Geltner, Professor of Real Estate Finance
All major asset classes including stocks and bonds have a well developed derivative market.
Derivatives enable counterparties to reflect a view on a particular market, without having to trade
the underlying asset. This seems to be a particularly appealing feature for real estate, an industry
characterized by high transaction cost, long lead transaction time and lack of short-selling
mechanism. Still, real estate remains the last major asset class without a liquid derivative market
until recently when Credit Suisse began to offer swaps on the NCREIF Property Index (NPI) in
the U.S. early this year following the UK’s ten-year endeavor in developing real estate derivative
market.
The purpose of this thesis is two fold. First, in chapter one and two, we would like to explain
what real estate derivatives are, how they work and why they can be beneficial to investors.
Second, we are introducing some practical tools investors may use in evaluating and trading real
estate derivatives. In chapter three, we are introducing three forecasting models on the NCREIF
Property Index. In chapter four, we are expanding Prof. David Geltner’s pricing methods on real
estate index capital return swap to the NPI total return swap and property type total return swap.
These pricing methods present a basic foundation for investors to price all three types of swap
currently being offered by Credit Suisse.
In our study, we find that derivatives can provide numerous benefits to real estate investors
including low transaction cost, quick execution and short-selling mechanism. These benefits in
turn can help investors implement various strategies including hedging against market risk, asset
allocation, sector rebalancing, international diversification and portable Alpha. Our research on
UK’s experience in real estate derivatives as well as our investor survey results in the U.S. and
the UK lead us to believe that further initiative and pioneering efforts are critical for the
development of the real estate derivatives market. By presenting this study on index forecasting
models and pricing methodologies, we hope to increase the awareness and comfort level of
investors and thus encourage the proliferation of real estate derivatives.
THINK INSIDE THE BOX: AN ANALYSIS OF CONVERTING COMMERCIAL PROPERTY INTO SELF STORAGE FACILITIES
Sean Jeffrey McKinley
Advisor: John Kennedy, Lecturer, Center for Real Estate
The modern self storage facility is a multi-tenant operating business that reflects the
needs of residential and commercial customers. The industry has evolved from a
transition asset to a property type that adheres to location qualities that typifies those of
the modern retail facility while conforming to the architectural and aesthetical qualities of
the community. Unfortunately, the modern day storage developer confronts thirty plus
years of negative public perception that is typically associated with this asset class.
Recent court cases are utilized to distill a general thought pattern for why local
municipalities are curbing new construction of this market demanded asset class.
Given the mounting barriers to entry for self storage developers juxtaposed against the
continued market demand for the product, the thesis attempts to find a middle ground for
these market forces in the form of converting an existing commercial structure. Two
facilities are extensively researched and used as a case study for establishing a model
to emulate in future conversion projects. Utilizing existing precedents and additional
market resources, a step-by-step qualitative and quantitative model is designed to assist
in analyzing the probability of success for a future conversion opportunity.
Qualitatively, the first analysis for determining if storage conversion is applicable to the
existing structure is done through the use of a feasibility analysis pertaining to the
demographic attributes surrounding the property. If the property meets enough of the
qualities associated with a successful facility then additional analysis is warranted. This
analysis occurs on a quantitative basis using basic market and property variables to
estimate the cost of construction and operating expenses associated with the region
where the storage facility is located. The overall framework yields a general “go or nogo”
model applicable for future self storage developers considering a property for
conversion.
Innovative Topics in Structural Engineering and Real Estate Development: Blast Resistant Facades & Incentives for Large-Scale Smart Growth Development
Abraham Menzin
Advisor: Oral Buyukozturk, Professor of Civil and Environmental Engineering
This thesis is divided into two distinct parts. Part 1 relates to the requirements of
the S.M.C.E.E. degree, and Part 2 relates to the M.S.R.E.D. degree.
Part 1: The Influence of Boundary Conditions and Higher Mode Shapes on
First-Crack Prediction for Blast-Resistant Glazing Systems: This study
reviews the extent to which two commonly used assumptions in the design of
blast-resistant glazing systems influence modeling results. Blast-resistant
glazing designers typically model glazing by assuming that glass plates are
simply supported on four edges, and that they can be represented by a single
degree of freedom model that assumes one mode of vibration. In reality, glazing
sealants provide elastic support, and the dynamic response of plates to blast
loads consists of the superposition of several modes of vibration. This study
investigates the inaccuracy caused by these assumptions by comparing
conventional results to those of more sophisticated finite element analyses.
Part 2: A Survey of Incentive Programs and Strategies for Large-Scale,
“Smart Growth” Developments in Massachusetts: Chapter 40R/40S,
TIF/DIF/UCH-TIF, Special Development Districts, Affordable Housing
Programs & Grant Programs: Politicians and legislators have placed a
significant amount of emphasis on high-density, transit-oriented development as
a method of dealing with the “housing crisis” in Massachusetts. However, the
type of infill redevelopment projects that the state wishes to encourage often face
feasibility problems related to high infrastructure costs associated with
redevelopment, rising construction costs, high affordability requirements, and/or
the cost of creating structured parking. This study examines the extent to which
several newly created and existing programs are capable of helping large-scale
smart growth projects attain feasibility and it provides strategies for using them.
The surveyed programs include Chapter 40R/40S, TIF/DIF/UCH-TIF and special
development districts, Affordable Housing Programs and other Grants.
REDEVELOPING GREYFIELDS: DEFINITIONS, OPPORTUNITIES AND BARRIERS
Amy W. Merritt
Advisors: Henry Pollakowski and Lynn Fisher, Principal Research Associate and Assistant Professor of Real Estate
The study of greyfields for this thesis was motivated by the increasing problems of traffic and air
pollution associated with sprawling development patterns. Typically located in inner ring
suburban areas, greyfields, or failed retail malls, represent sites that can be redeveloped
profitably into mixed-use, walkable neighborhoods. Yet, few successful examples of greyfield
redevelopment exist, especially when compared to the relative proliferation of brownfield
redevelopment.
Brownfields, or contaminated urban sites, are very costly to remediate and it is surprising that
this type of redevelopment outpaces greyfield redevelopment on such a significant scale. This
thesis addresses the disparity between the two redevelopment types and describes differences
between brownfields and greyfields through application of an economic model for
redevelopment. The variables of the model are then applied to each redevelopment type and
considered in the context of several greyfield case studies located on the east coast.
Where the economic model is incomplete in fully explaining the disparity between the
redevelopment types, factors outside of the model have been considered, including the existence
of externalities and public subsidies at federal, state and local levels. Lastly, suggestions of how
to foster increased implementation of greyfield redevelopment and create an industry around the
reuse of greyfield sites are discussed.
An Analysis of Investor Types in Real Estate Capital Markets: Their Behavior and Performance from 2000 to 2006
John Harris Morrison III
Advisor: Henry O. Pollakowski, Principle Research Associate
This thesis explores the timing and returns of eight types of real estate investors between
2000 and 2006. The investor types considered are 1) private local, 2) private national,
3) institutional, 4) public REIT (Real Estate Investment Trust), 5) foreign, 6) user/other,
7) syndicator and 8) condo converter. Observing over 41,000 transactions and using the
repeat sale method to calculate investor capital appreciation returns, this thesis finds that
private local investors are the largest investor type—both in absolute number and
transaction volume—suggesting that real estate is still a very local business. In addition,
this thesis observes that REIT, foreign and private investors each exhibited leading
behavior over other investors, especially institutions, in capital flows: they each tended to
start trends in buying and selling at various times from 2000 to 2006. Moreover, it finds
that REIT, foreign and private investors took turns in earning the highest cumulative
capital appreciation returns from 2000 to 2006, and that private local investors tended to
lead all other investors, especially institutional, in return trends. These findings are
significant as they increase the understanding of investor behavior and performance in
capital markets and may ultimately help increase market information and efficiency.
“FOR GOOD DESIGN, YOU PAY NOW. FOR BAD DESIGN, YOU PAY LATER.” – OR DO YOU?
Meena Murugappan
S. Michael O’Young
Advisor: William C. Wheaton, Professor of Economics
What is the value of architectural design on office building income? This empirical study
of 296 office building located in 11 Metropolitan Statistical Areas (MSA) hopes to quantitatively
determine if a plain vanilla cereal box suburban office building commands more or
less net operating income than an office building with a higher level of design.
Previous empirical studies have found a strong influence of design on rents but were limited
in geography, building characteristics and total number of observations. In an important
study by Vandell and Lane (1990), they found that good architecture commanded a
premium of over 20% in office rents. Also, their study showed that good design cost more
to produce on average, but not necessarily in every case.
Data was gathered from a portfolio of US office buildings and consisted of building metrics
and property level 2000-2005 Net Operating Income (NOI). This base data set, MSA
dummy variables and architectural attribute dummy variables (created by the authors)
formed the backbone of the research. Multiple log linear regression analysis was conducted
to identify the economic effects of good design.
In addition, a survey taken by 31 architects was used to capture subjective rankings on the
all 296 office buildings to determine if there is a consensus as to what constitutes good design.
It is hoped that these professionals, who are formally trained and are practicing in
the field, are well-qualified to evaluate the design of each building.
The survey results showed that the architects’ responses are idiosyncratic and subjective.
Not only did the individual participant’s rankings show no significant relationship with
one another, but also did not exhibit any relationship with actual building NOI.
The empirical study found that the market paid a premium of 7.9% for buildings with
non-center cores. Also, a significant 11.7-13.2% premium was paid for properties with
non-rectangular and non-square shaped floor plans. Finally, buildings with 60% to 90%
exterior windows commanded a substantial 10.7% premium. These results imply that better-
designed buildings generate higher NOI either because the tenants are willing to pay a
premium or because the operating costs of the building are less, or both.
The Central City: Why the Comeback?
Scott Nguyen
Advisor: William C. Wheaton, Professor of Economics
Recently, scholars and non-scholars alike have written and spoken much about the reversal
of urban sprawl and the in-migration of young professionals and empty nesters. The
objective of this study is first, to examine the relative city performance for the three defined
metrics to determine whether cities are leading or lagging their MSAs in each respective
metric and second, to determine how differences in relative performance correlate to the
independent variables. Additional analyses will be performed to determine changes in
household composition and relationships between supply growth and demand growth.
This paper, using OLS regression techniques, examines the correlation between various
measures of relative city to MSA growth performance (specified as relative population,
housing unit and property value growth) and various independent variables for a
representative sample of seventy three metropolitan areas. The study period includes data
from 2000 to 2004. The twenty eight independent variables can be categorized into three
major groups: (1) Demographic Characteristics (2) Environmental Characteristics and (3)
Transportation Statistics.
The results show that, on average, central cities perform worse than their MSAs in terms of
housing unit and population growth while outperforming in terms of property value growth.
In central cities, housing units are growing faster than population, indicating either shrinking
household size or increases in investor/second home demand. Considerable variation exists
and averages do not tell the whole story. Certain independent variables, namely roadway
miles and transit miles have strong correlations to relative growth metrics while others such
as the city’s proportion of total MSA population have no observable relationship. Another
surprising result is that a city’s proximity to a water amenity has negative correlation to its
relative population, housing unit and property value growth rate.
THE AMBIVALENCE OF GENTRIFIERS
Alison Elizabeth Novak
Advisor: Terry S. Szold
Reader: Lynn Fisher
This thesis explores the paradox faced by 25-34 year-old, White, well-educated persons who choose to live in predominantly low-income neighborhoods. In particular, this thesis asks if gentrifiers are aware of gentrification and their role in it, and then how they navigate that paradox.
The thesis is grounded in interviews with residents of three Boston neighborhoods that are in various stages of gentrification: the South End, Jamaica Plain, and Dorchester. The interviews are framed within a synthesis of academic theory, a description of the introduction of the term “gentrification” to the United States, and common perceptions of gentrifiers as portrayed in academic and popular cultural. This framework is meant to expose the difficulty of using the term consistently, and its emotional power. Readers who are not familiar with the term or its complex background should find this framework helpful in forming a basic and thoughtful understanding. More advanced readers should use this thesis to critically explore their own position and build a more sophisticated understanding.
Though the core meaning of the term “gentrification” has not changed substantially from its original definition in 1964, a wide variety of qualifiers have been attached to the term resulting in highly positive and highly negative connotations. One explanation for these wildly varying perspectives is that gentrification is a topic that reflects larger human issues such as self and group identity, as well as socio-economic class. The result is twofold. One, these issues are so fundamental that discussions involving them have highly emotional stakes. Two, the topic brings together interdisciplinary academics and practitioners who often have conflicting paradigms and perspectives.
Many of the gentrifiers reported that they live in their neighborhood due to practical matters, such as affordable homeownership, as well as less easily defined concerns, such as the sense of belonging to a diverse community. Nearly all of the gentrifiers expressed inner conflict over being a potentially negative force in the neighborhood, and a large number described ways they attempted to mitigate or explain away that force.
Using the reflections of this group of gentrifiers to better understand their motivations and concerns, should enable community planners and real estate developers to work more successfully in gentrifying neighborhoods by tapping into the human, social, and economic capital brought by gentrifiers. Planners and developers are encouraged to take a mutual gains approach, emphasizing opportunities for connection rather than polarization.
Stocks Are From Mars, Real Estate Is From Venus: An Inquiry into the Determinants of Long-Run Investment Performance
Arvind Pai
Advisor: David M. Geltner, Professor of Real Estate Finance
This thesis presents an inquiry into the historical performance of core institutional real estate investment
property during the 1984-2003 period. The focus of the analysis is on identifying systematic determinants
of long run investment performance. The analysis seeks to increase our understanding of equilibrium
asset pricing within this asset class, as well to provide some useful perspective for core portfolio strategic
or tactical planning. This thesis extends earlier research by Geltner (1999) and Li and Price (2005) that
indicated that a classical single-factor CAPM accurately modeled the cross-section of long-run total
returns across the major asset classes, including real estate. The present thesis narrows that earlier focus to
concentrate on the cross-section of long-run total return performance within the core institutional real
estate asset class. This thesis uses the property level data of the NCREIF Index to construct portfolios and
historical return indexes based on property size (value), and based on CBSA “tier” (that is, “upper”,
“middle”, and “tertiary” cities from an institutional investment perspective).
By using unique portfolios created from the NCREIF property set that represent possible factors that
systematically affect asset pricing, such as property location, property size and property type, and
calculating their beta estimates from historical data, this thesis tests various CAPM models including the
single factor Sharpe-Linter model, as well as a multi factor Fama-French-like model. The beta for the
portfolios was defined with respect to the performance of the aggregate of all NCREIF properties.
This thesis finds that an equilibrium asset pricing model consisting of the two Fama-French-like factors,
property size and MSA tier, plus property type dummy variables, explains some 90% of the long-run
historical cross-section of core property portfolio returns. Interestingly, the “market factor”, the beta with
respect to aggregate NCREIF, is found to be insignificant, and possibly a negative influence on expected
return. Furthermore, the size factor works opposite to the way it does in the stock market, with larger
properties commanding an expected return premium. Surprisingly, the city “tier” factor gives an expected
return premium to upper tier cities. Tests for an “income factor” (similar to the Fama-French book-tomarket
factor) found this factor to be insignificant. The most significant factor was found to be the
property type. Thus, the equilibrium asset price model that seems to work well within the institutional
core real estate asset class seems to be very different from, almost opposite to, the analogous model
within the stock market.
The Value of Contractual Terms in Office Leases
Kevin T. Sheehan
Advisor: Henry O. Pollakowski, Principal Research Associate, Center for Real Estate
This paper uses a comprehensive data set to develop a hedonic model of office rent that
estimates values of contractual terms such as tenant improvement allowances, leasing
commissions, and options. The model includes variables to control for building characteristics
and market conditions, as well as basic lease terms. Although other studies have used a similar
approach, the prior work in this area was limited by the lack of data regarding contractual terms.
The results show that there is a consistent, upward-sloping, convex term structure of rent.
Furthermore, there is an insignificant “size premium” but the “proportion discount” is
significant. In general, other variables, such as location variables and qualitative variables
behave as expected, with the exception of the expense type dummy variables.
Tenant improvement allowances and leasing commissions paid by the landlord do not have a
predictable impact on rent at low levels. But high levels of allowances and commissions result
in significant rent premiums. These results indicate that lower levels of allowances and
commissions may be expected by the market. At higher levels, however, these contractual terms
are clearly priced into rent levels.
Renewal options appear to have positive impacts in some years and negative impacts in other
years. Renewal options may represent amenities that are granted to tenants as inducements in
weaker leasing markets but are priced in stronger markets. Termination options and rights of
first offer/refusal appear to have negative impacts on rent that are somewhat consistent in all
years. This is counterintuitive because these options are thought to benefit the tenant. One
explanation is that these options are in fact beneficial to the landlord.
Further study is necessary to understand the value of these options. Overall, more information
about options terms would be beneficial. Information such as the renewal rent, the termination
fee, and the size of the offer/refusal space would help us to understand the economic
arrangement between the parties and to predict the corresponding impact on rent.
The Process of and Barriers to Environmentally-Oriented Real Estate Development: Examining the Role of Organizational Structure, Project Delivery Methods and Contracts in Low Impact Development
Charu Singh
Advisor: Eran Ben-Joseph, Associate Professor of Landscape Architecture and Planning, Department of Urban Studies and Planning
Low Impact Development (LID) is a site planning approach that limits the environmental impact
of development on the local hydrological regime. By preserving and mimicking natural landscape
features, LID introduces a new site planning and stormwater management paradigm to mainstream
real estate development and represents a product innovation in the industry. Through the
examination of three case studies, this thesis explores the sources of innovation and the risks of
implementation. It then examines whether changes to delivery and contract structures might be
necessary to redistribute risks and incentives among members of the development team in order
to realize LID practices.
The investigation finds that the private sector plays an integral role in advancing LID. Often
developers are the first adopters of this innovation. The success of their projects motivates
municipalities to encourage the innovation through regulation and training. The projects that
present the most innovative approach institute small, integrated, multi-disciplinary corporate
and project team structures. Examining the process of implementing LID practices reveals that
innovation does not introduce new sources of risk; rather it exacerbates existing sources of risk at
each phase of development. Much of this increase in risk is related to the innovation’s nascent stage
of adoption and is related to informational or educational lags in the industry.
Incremental process innovation is crucial to proper implementation of LID practices. The
design phase should incorporate environmental analysis, include a diverse in-house team with
environmental backgrounds, and encourage collaboration between generalists and specialized
consultants. Other process innovations should be structured to educate industry professionals
about the principles and practices unique to LID. The appropriate project delivery and contract
arrangement is dependant on the extent to which a project adopts the full suite of LID practices.
In instances of moderate product innovation, developers focus on process innovation and seek
unilateral control through the multiple primes delivery method and time & material contracts.
These structures place the most risk and incentives with the developer, who is best-suited to lead
the process. Conversely, in projects that focus on product innovation and adopt the breath of
LID’s technical practices, the developer relinquishes control of the process, assigning the risk (and
associated incentives) of delivery to specialized consultants who are better able to realize the
innovation.
Uncommon Ground: Property, Coordination, and Rebuilding New Orleans
Paul Stewart
Advisor: Lynn Fisher, Assistant Professor of Real Estate
Following Hurricane Katrina, difficult decisions must be made by both government and
investors with respect to reconstitution of New Orleans’ housing stock and neighborhoods. For
investors, risk and uncertainty abound. For planners, a careful balance between property rights
and comprehensive planning is required. The fate of several neighborhoods hangs in the balance.
What will it take to recapture the value these neighborhoods once held? Specifically, will the
market arrive at a solution or is government intervention called for, and if so at what level?
Likewise, what role is warranted for the third sector - nonprofit and community organizations?
The thesis argues that private developers and government agencies may be poorly equipped to
the task, and formal or informal sub-municipal level organizations may be better positioned to
engender successful rebuilding by accommodating and reconciling the interests of individual
property owners.
Improving Real Estate Project Delivery in Malaysia: Analysis, Comparison and Selecting the Best Method
Yew Chin Tan
Advisor: David Geltner, Professor of Real Estate Finance, Department of Urban Studies and Planning
The real estate and construction sectors are very important and integral part of the Malaysian
economy. At a macro-level, governmental development plans in Malaysia are based on
successive five year plans since 1956. For each of the five year plans, the real estate and
construction sectors feature prominently in terms of value and policy implementation. The
budget for the five year plans is in relation to public sector expenditure and does not include
private sector initiatives. As regards real estate project delivery methods in Malaysia, the most
common form is the traditional design-bid-build method. The design-build method is getting
some acceptance of late, whereas infrastructure projects do adopt the build-operate-transfer
method.
This thesis seeks to classify, analyze and compare the various types of delivery methods and
thereafter examine whether there is a methodology for selecting the best delivery method in
Malaysia. Each delivery method, apart from actual project delivery itself, entails different
apportionment of project risks between the owner and contractor. Choosing the right delivery
method can lead to project success, whereas selecting the wrong delivery method invariably
leads to project failure.
For the private sector in Malaysia, the owner can pretty much choose the most commercially
viable project delivery method. However, for the public sector, there are political and policy
considerations, and rules and regulations which may affect the choice of project delivery method.
As a developing country, there is much that Malaysia can learn from the US and other developed
countries which are more advanced and experienced in terms of project delivery methods,
construction and engineering.
The Application of Simulation to Project Evaluation for Real Estate Developers in China
Yongchun Tian
Advisor: Brian (Tony) Ciochetti, Thomas G. Eastman Chair, Chairman, Center for Real Estate
For developers in China to calculate project financial returns in order to make investment
decisions, the traditional Excel model only gives “point estimate” (i.e. a single value) for each
input variable, and therefore the model can only reflect one possible scenario. Yet in reality
many different things could happen to any input variable in the financial model, which could also
result quite different outcomes. Developers in China face a huge degree of uncertainties
including changes in market conditions which impact sale price and time duration of selling the
product and fluctuations in construction costs, in addition to the uncertainty of the land cost
which is derived from the unique bidding process in China.
This thesis will thoroughly illustrate the land policy and some associated unique features in the
real estate development in China, followed by an introduction of the financial model currently
used by China’s developers. The thesis then addresses risk management issue by introducing the
Monte Carlo simulation method and by incorporating simulation into the financial model for
project evaluation. The thesis will explain how and why simulation can improve the traditional
Excel model, and therefore help management to make more informed decisions with enhanced
efficiency and accuracy.
Building on Lessons Learned: Too High Hopes Without HOPE VI?
Kristen J. Wang
Advisor: Langley Keyes, Ford Professor of City and Regional Planning
By providing substantial grants to public housing authorities to demolish and rebuild distressed
public housing and provide services to public housing residents, the HOPE VI program has
helped transform these developments and their surrounding communities since 1992. HOPE VI
has not only brought public and private investment to distressed neighborhoods but also has
played an important role in increasing development capacity for housing authorities and HUD.
In spite of the successful completion of many projects in the last decade, arguments have been
made that HOPE VI is not only too expensive and too slow but is no longer needed. Housing
advocates have also argued that there are programmatic flaws that must be reformed. The
Bush Administration has sought to cut HOPE VI from the federal budget for the last four fiscal
years. Congress has reinstated it each year, albeit at lower and lower funding levels, but the
future of HOPE VI is uncertain at best. As the only funding program specifically designed to
meet the needs of distressed public housing and its very low-income residents, HOPE VI is not
easily replaced.
Despite the challenges, many housing authorities and their partners are attempting to assemble
funding for desperately needed public housing redevelopment projects. Interviews with housing
authorities, developers, and consultants provide an understanding of the strategies that housing
authorities are using to make these “post-HOPE VI” projects work. Housing authorities and their
public and private partners have crafted innovations intended to replicate HOPE VI results, but
without HOPE VI funds, these projects will only be possible through the piecemeal assembly of
public and private funds and are likely to lack the holistic approach and broader vision enabled
by HOPE VI. Without seed capital and without the flexibility to be creative, public housing
authorities will have a limited ability to build on their entrepreneurial skills, partner with the
private sector, and meet the needs of their residents and capital assets. Killing one of the few
innovative government programs to emerge in the last decade is a waste and does not bode
well for the future of very low-income families—a “HOPE VII” program is needed to build on the
public learning achieved during HOPE VI and these early post-HOPE VI efforts.
Seasonality in Commercial Real Estate Transaction Volume and Capital Returns
Xiaohu Wang
Advisor: Henry Pollakowski, Principle Research Associate
In this thesis I examine the existence of seasonality in quarterly transaction volume
and capital returns in commercial real estate markets from 1984 to 2005, based on
MIT’s Transaction-Based Index. Evidence is provided that (1) transaction volume
distributions in fourth quarter and capital returns distributions on all properties in third
quarter have large means relative to the remaining three quarters; (2) there exists
4-quarter lagged systematic seasonality in capital returns on all properties, based on
the results from an autocorrelation function.
WHAT HAPPENED TOTHE THREE-DECKER?
JACOB WEGMANN
Advisor: Sam B. Warner, Visiting Professor of Urban History
This thesis examines the three-decker, a type of small apartment house (“superposed flats”) that is common in
the Boston metropolitan region and elsewhere in New England. The three-decker is distinctive in two ways: its physical
form, which is moderately dense and yet modest in scale; and its tenancy structure, which typically involves one
household owning the entire building, while residing in one apartment and renting out the other two. This thesis poses
three, interrelated questions: What is the origin of the three-decker? Why did it substantially disappear in the Boston area
after 1920, and altogether by 1930? And what has kept it from coming back?
In order to get at these questions, the thesis both examines the three-decker in its local context, and compares
and contrasts it with similar building types in three other North American cities that have a rich tradition in them: Chicago,
Montreal, and New York City. Chapter 1 introduces the topic and describes the three-decker and its counterparts
elsewhere. Chapter 2 is a historical analysis that addresses the questions of the origins and decline of the three-decker.
Chapters 3, 4, 5 examine in turn design, economic, and regulatory factors that impinge, either negatively or positively,
on the prospects for the three-decker and similar building types in the present day. Chapter 6 offers a summary of the
findings, along with policy recommendations pertaining to the encouragement of superposed flat production and some final
thoughts on the viability of the three-decker today.
The three-decker is found to be a building type that is problematic in all but a few limited applications in the
current era. However, the broader category of superposed flats is found to offer a great deal of potential, both for urban
form-giving and for affordable housing. This potential is currently being realized, to different extents and in different ways,
in Chicago, Montreal and New York, but not in Boston. This thesis argues that this should change, and that furthermore the
superposed flats family of buildings has a lot to offer to cities – the majority of metropolitan areas on the North American
continent – where it has never been part of the palette of residential forms.
Understanding the Value of Boutique Hotels
Daniel F. Wheeler, IV
Advisor: Peter Roth, Lecturer, Department of Urban Studies and Planning
In recent decades, boutique hotels have witnessed a dramatic increase in popularity in the United States. The
purpose of this paper is to provide the reader with an understanding of boutique hotel value and conditions that
allow for boutique hotel success. First, it will provide a formal definition of boutique hotel, a definition which
remains elusive despite the popularity of the hotel category. Second, it will provide a comparative analysis, based
upon price-per-room paid by investors, of three different hotel categories: boutique, independent, and branded chain.
In defining boutique hotel, the paper relies upon both written definitions and interviews with real estate developers
and real estate brokers. The boutique hotel category is defined, and then contrasted with the definitions of
independent hotels and branded chain hotels.
In analyzing boutique hotel value, the paper considers hotels that have sold in the past five years in Boston, New
York City, and Washington D.C. Price-per-room paid by investors for these hotels is compared across each of the
three hotel categories, in each of the three cities. The paper analyzes the results of the value comparison of the
different hotel categories. In conjunction with such analysis and interviews, tourism data for each city is reviewed
in an attempt to gain a deeper understanding of boutique hotels.
In conclusion, the paper discusses conditions that allow for boutique hotel success, and potential cultural
explanations for the boutique hotel movement. Potential shifts in American consumer interest are discussed, as well
as the broader significance of the boutique hotel movement.
Brownfield Financing in the United States: From Social Benefit-Cost Perspective
Rongtao Xu
Advisor: Karen R. Polenske, Professor of Regional Political Economy and Planning, Department of Urban Studies and Planning
Reader: David Geltner, Professor and Director, Center for Real Estate
Since 1995, the government has launched brownfield financing programs to promote
brownfield cleanup and redevelopment in the United States. These programs have
lowered financial barriers for brownfield developers and returned vibrant properties to
communities.
In this study, I focus on examining the efficiency of these incentives from the social
perspective and proposing optimal funding decision rules. I hypothesize that brownfield
funds are not allocated optimally in some cases. First, I investigate the current
brownfield financing programs at federal, state, and local levels. Second, based on
externality and welfare economics theories, I propose an optimal funding-decision flow
chart. Third, by testing my hypothesis on three brownfield cases in Massachusetts, I
perform social benefit-cost analyses and determine whether brownfield funds were
justified by their social returns. Finally, I discuss the major findings from these case
studies and point out ways to improve current brownfield financial and non-financial
policies.
Based on theoretical analyses, I propose that the government should not sponsor
projects with positive private net present values, but rather focus on projects that have
positive net present social values and not feasible without subsidies. In the real world, it
is difficult to measure the social benefits of a brownfield redevelopment accurately,
especially before a development project is completed. Hedonic models show that only
one of three cases exhibit significant positive enhancement on housing values after
redevelopment. Only development of a simple rule-of-thumb benefit assessment toll
would make an optimal brownfield funding decision possible.
County Regulation of Large Scale Commercial and Industrial Real Estate Development in the Southwest: Is It Effective?
Barrett Elizabeth Yates
Advisor: Brian Anthony Ciochetti, Ph.D., Thomas G. Eastman Chair, Chairman, MIT Center for Real Estate
Real estate developers and county officials were surveyed to determine the existence, content
and accessibility of county regulatory guidelines for land use and real estate development
projects in the southwestern US. Further, the developers and county officials were interviewed
to understand the relationship between the quality of the regulatory guidelines and the
associated process, and the quality of real estate development in the specified counties. The
results from the survey and interview processes were analyzed to assess the efficacy of the
county regulatory process for large scale commercial and industrial real estate development.
In most counties where the surveys were conducted, guidelines covering zoning and zoning
related processes, planning, public works and transportation did exist but their currency and
relevancy was questionable. All county regulatory bodies surveyed were in the process of
updating the guidelines to make them current, clear and comprehensive for the existing
communities, many of which were experiencing rapid population growth. County officials and
developers agreed that quality of regulation significantly affects the quality of real estate
development, thus impacting future economic development.
This thesis recommends updating guidelines to focus on certain key aspects for each guideline
area studied: zoning and zoning related processes, planning, public works and transportation.
Further, this thesis recommends bifurcating the guidelines and approval processes for large
developments which can dramatically impact infrastructure, transportation and community
sustainability versus small developments which may have a negligible impact on these areas.
Additionally, this thesis contemplates the establishment of regional bodies to oversee certain
aspects of land use planning unifying neighboring areas and reducing duplication of planning
efforts in adjacent counties.
