 Joshua Harris, Ph. D., CAIA Director, Dr. P. Phillips Institute for Research and Education in Real Estate

3  Value of Real Property ◦ Highest and Best Use ◦ Income and/or Economic Utility delivered ◦ Option Component  Real Property Options ◦ Option to Expand ◦ Option to Reduce ◦ Option to Change Use ◦ Option to Delay  Total Value = Real Value + Option Value

4  Classical Financial Options (i.e. Puts & Calls) ◦ Volatility ◦ Discounting Rates ◦ Time Until Expiration ◦ Dividends  Applied to Real Property ◦ Volatility of Demand (Macroeconomics) ◦ Volatility of Supply (Capital Markets/Const. Prices) ◦ Volatility of Regulation  Bottom Line – Economy Determines Volatility

Source: Bureau of Economic Analysis

Source: Bureau of Labor Statistics

Source: Census Bureau

Source: Bureau of Economic Analysis

Source: Census Bureau

Source: Bureau of Economic Analysis

Source: Census Bureau

From October 2012 – 1.69%

A Year Ago 2.67% - a 58% Jump

One Year Later 2.26% - a 15% DECLINE

Source: U.S. Census Bureau

 Growth of MSA >1 million, 2014 YTD Source: U.S. Bureau of Labor Statistics, Forbes.com

23  Growth of MSA >1 million since 2000 (YE 12) Source: U.S. Census Bureau, Forbes.com

24  Growth of MSA >1 million from Source: U.S. Census Bureau, Forbes.com

25  New construction occurring across the board  Banks are desperate to lend  Apartment Rental Rates & Home Prices rising  Commercial Real Estate Prices at or above prior peak  Risk of oversupply, still fairly low

 Highest and Best Use may change rapidly  Urban Markets are more desirable  Infrastructure DID NOT keep pace, or even close  Values are tricky, my sympathies to the Appraisers (….Option Values)