Changes in real estate markets: office buildings and hotels

Welcome back to Real Estate Economics. I'm John McDonald, Emeritus Professor at the University of Illinois Chicago and Emeritus Professor of Real Estate at Roosevelt University. Today, the topic is change in real estate markets. We're going to look at what are frankly some extreme cases of changes in real estate markets to see how real estate markets respond.

Moving on here, let's take a quick look at office building markets. Some basic facts about office buildings. First of all, large office buildings are very durable and take years to construct. The planning phase can take a long time. Getting the approvals to build where you want to build will take time, all of that adds time to the process. Variations in demand show up in changes in vacancy rates and rents, of course. As they do in all real estate markets. But the actual rent includes incentives that are hard to track down. As I mentioned before, the face place rents that you read in the newspaper or on the Internet really don't tell you what the rent is, because you have to know what are the incentives that are being given to potential tenants like months of free rent, moving expenses, allowances for making your office space fancier than it is. All that sort of thing. But vacancy rates are quite easy to measure, so that's what we look for. Furthermore, as I mentioned, the decision to build depends on a demand forecast for some years in the future because it takes so long to build a major office building. You can build a small office building out the suburbs very quickly like housing. But the major office buildings take a long time to plan and construct. They need to have a forecast to what it's going to be in, I don't know five, seven, eight years into the future. Forecasts can be wrong. Really? Yes, they can. What happens if the forecasts are wrong? We're going to take a look at that.