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Demand Management - Manish Jain - 11-11-2018

Real Estate Demand Concepts


•The demand for real estate space can be defined as the quantity of space or number of units demanded at various prices.  The fundamental law of demand states that the quantity demanded declines with price or that a lower amount of space or number of units is demanded at higher prices.


•Demand definition is the concept of effective market demand, the demand that is backed up by purchasing power. In some cases, in real estate analysis we may need to focus on desired or ex-ante demand. This refers to the aggregate desired quantity of a good before consumers interact with the marketplace. After interacting with the marketplace, however, realized or ex-post demand may be different from the ex-ante demand for various reasons, such as supply constraints. The not-yet-realized demand is often referred to as pent-up demand.

RE: Demand Management - Manish Jain - 11-11-2018

1.The price elasticity of demand is determined by the availability of substitutes. For example, a product with few substitutes, such as luxury housing, should have a less elastic demand than a product with plenty of substitutes, such as middle-income housing. Similarly, the demand schedule for a submarket must be more price elastic than the demand schedule for the whole metropolitan area since there are many substitutes for the former (other sub-markets) but hardly any substitutes for the latter. To better understand this argument consider that most of the companies housed in a metropolitan area serve the local population and businesses. Thus, while these firms can move from one submarket to another submarket and still be able to serve their local clientele, they can not do so if they move to a different metropolitan area.


2.Why is the concept of the price elasticity of demand relevant for real estate analysis at the macro or micro level? At the macro level, it can help gauge the impact of changes in market prices or rents on demand and more specifically, on the amount of space and/or number of units demanded. At the micro level, it can help investors and developers assess the impact of price increases on revenues.


3.Developers and investors would always prefer to face inelastic project demands because if prices/rents increase, revenues increase as well, as demand/absorption does not decrease enough to eliminate the gains from rent increases.


4.The exogenous drivers of the demand for real estate can be classified into the following four categories:

  1. Market Size (Population, Employment)
  2. Income/Wealth
  3. Prices of Substitutes
  4. Interest Rates