Yale School of Management Retail, Location and Cities Lecture for Real Estate Class William N. Goetzmann

Yale School of Management Overview Location analysis  Retail application What are cities?  Models on cities  Economics of place

Yale School of Management Location Analysis Where to place a market How to estimate sales How to factor in competition

Yale School of Management Retail Real Estate Variety Specialty Limited Line Department Mass Merchandise Discount Warehouse

Yale School of Management Types of Shopping Centers NameRadiusBuilding AreaGLA Convenience/ Neighborhood 6 min KSFsame Community15 min KSFsame to 400 KSF Regional30+ min500-1,000 KSF KSF Super-Regional45 min. world >1,000,000 SF no limit

Yale School of Management Mall Shape

Yale School of Management Rationale Anchors for Draw Shops for Impulse Finance:  Anchors own or lease cheaply  Specialty shops pay percentage rents

Yale School of Management Gravity Models William Reilly (1929)  "Retail Score Inversely Proportional to Distance" Geographical Settlement Patterns Applications:  How many customers will come to the store?  Where should we locate our store?  What kind of store will work?

Yale School of Management Example Mall location analysis in Connecticut Travel Times Population Centers Mall Size

Yale School of Management Travel Distance in Miles (or Minutes) Mall AMall BMall CDemand by City City ,000 City ,000 City ,000 Square footage 10,0002,50020,000

Yale School of Management A Gravity Score Mall AMall BMall C Score: square footage of space/distance2, , , , , , Sum of score by mall7, , , e.g. 2,500=10,000/4

Yale School of Management Market Share by Mall Mall AMall BMall C Mall market share of each city sales City Mall score/ sum of scores per city City City E.G..34= 2,500/(2, ,000

Yale School of Management Estimated Sales of Each Mall Mall AMall BMall C Total City 1 17, , , ,000 City 2 17, , , ,000 City 3 8, , , ,00 0 Market share times city demand e.g. 17,045.45=.34x50,000

Yale School of Management Issues Linear model Mix of retail Consumer types Inter-position on locations Sayes’ law

Yale School of Management Location Cities from first principles Monocentric city model  William Alonso (1964) Location and Land Use  Richard Muth (1969) Cities and Housing Transportation costs Employment and shopping take place at one point Demand for housing/budget constraint Utility for leisure time

Yale School of Management Results Housing prices (and rents) are a decreasing function of distance from CBD. Shifts in transportation costs and travel times can be analyzed. Calculus for understanding new structure of cities. E.g. Rae (2004)

Yale School of Management Another Approach What are cities?  Employment  Shopping  Social centers  Private property  Public amenities What makes them grow?

Yale School of Management From: Diego Puga

Yale School of Management Human Capital Acquisition of labor is easier. Knowledge spillover leads to positive externalities. Diversification (Jacobs/Glaeser)  Reduces labor risk Competition  Leads to innovation Specialization (Marshall/Arrow/Romer)  Develops particular technology

Yale School of Management Goetzmann, Massa, Simonov Specialization: the main industry in local employment / share of this same industry in national employment. Competition: number of firms per employee in a district relative to the number of firms per employee in Sweden. Diversity is the share of the next top (after the main one) five industries in municipal employment

Yale School of Management Savings, Investment & Finance Urban housing less risky  Diversified industry base => smooth demand Personal Portfolios  Knowledge spillover & speculation  Time and attention

Yale School of Management Swedish Household Data VariableMeanMedian Number of households292,901291,913 # of members in household # of adults in household Age of oldest household member % with secondary education43.5% % with higher education31.4%31.2% % of immigrants16.4%16.3%

Yale School of Management Wealth Variables Variable Representation in the sampleMeanMedian Wealth-Tax Payers7.9%359,592102,700 Real Estate Holders54.6%449,400387,000 Labor Income Earners100.0%321,489287,722 Entrepr. Income Earners9.8%88,11443,268

Yale School of Management Degree of Isolation and Equity Portfolio diversification Population Density-50.00(-3.04) Index of Rural Areas6.58(19.03) Distance from Airport1.34(4.09)

Yale School of Management Local Professional Specialization and Equity Portfolio Diversification VariableCoeff.t-stat Competition-12.80(-14.07) Specialization-0.74(-7.55) Concentration (-22.70)

Yale School of Management Under-Diversification Linked to knowledge creation and spill-over in the urban environment. Spillover that characterizes city agglomeration on the one hand reduces the availability of time to collect and analyze financial information Increases the relative information that an investor has with respect to stocks professionally or geographically closer to him.

Yale School of Management Cities Provide investment opportunities Require less risk hedging Result in capital growth and more spillover

Yale School of Management Creating Cities Costa Mesa, CA World Financial Center Canary Wharf, London Dubai, UAE