Friday, June 19, 2009

the production of real estate assets

the real estate values (prices) determined by the interaction of user markets and capital markets become a guide to real estate producers (builders,developers and conversion specialists). when market prices exceed the cost of productions, producers are more inclined to build , thereby simultaneously adding to the supply of space and to the stock of investable real estate assets.
Real estate production historically has been a volatile process because real estate price and costs tend to be volatile.The increase in supply by producers tends to lower rents in the user markets and to lower property values(prices),which reduces the feasibility of additional new construction.Thus,building booms and slumps often characterize real estate production.To compound the volatility further,real estate values also can be affected by shocks to the capital markets.For example,if interest rates rise,property values will generally fall,again rendering construction less profitable.Finally,construction costs can be very volatile.Organized labor disputes in cities such as New York or Boston,or unexpected events causing shortages in lumber or other building materials,can severely damage the financial viability of a major real estate development.

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