Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Central Place Theory “5% of U.S. land is in urban areas, but 90% of real estate value is in urban areas” Why???

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Location Patterns for City Size  Zipf’s Law (a.k.a. the Rank/Size Rule)

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Zipf’s Law in Practice

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Why Might Zipf’s Law Work?  Mathematically…  Suppose all cities grow at random rates over time.  Suppose all cities tend to grow at the same average rate.  Suppose all cities have the same “volatility” in their growth rates.  Zipf’s Law will hold!  Are these assumptions Reasonable???  Any Limitations???

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Patterns of City Location “Large cities tend to be spread out rather than concentrated.”

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Patterns of City Location “City Rank Changes tend to be relatively rare, and systematic rather than random.”

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Factors Driving Location Patterns  Centralizing/Centripetal Forces  Economies of Scale  Economies of Agglomeration  Positive Locational Externalities  “Cumulative Causation”  Decentralizing/Centrifugal Forces  Congestion  Pollution  Crime  Intra-urban transportation costs  Rent/land prices  Utility??? Correlation with City Size???

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Factors Driving Location Patterns  Central Place Theory  “In order to reduce ‘spatial friction,’ places of similar size, rank, or function will tend to be evenly spaced across geographical space and/or popluation.” Ex. #1: Minimize the average distance from HQ to city along a linear path. ABCDEABCDE

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Central Place Theory  If CPT holds, why aren’t all companies headquartered in Wichita, KS???  Limitations 1) Multi-dimensional spacing 2) Population/economic weightings

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University 2 Dimensional CPT

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Population/Economic Weights  Ex. #2: Now suppose that due to locational amenities (upwind, later sunrise, etc.) more people want to (and do) live farther west. Specifically, the population/market served in each town is as follows: A=50, B=40, C=30, D=20, and E=10. Where should the company locate now? ABCDEABCDE

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University What Makes Cities Grow?  Economic Base  Export (Basic) Sector –  Service (Nonbasic) Sector –  Economic Growth depends…

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Forecasting Growth in Cities  Estimate Growth by Industry  Compare Industry Growth to City Location Quotients:  Where: N mi = employment in city m, industry I N m = total employment (all industries) city m N i = national employment, industry I N = total national employment (all industries)

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Location Quotients  Ex. Estimate Lubbock’s widget making location quotient given the following data: Total U.S. Employment = 150,000,000 U.S. Widget Makers = 300,000 Total Lubbock Employment = 100,000 Lubbock Widget Makers = 700  Interpretation of Result:

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Multiplier Effects  Growth in the export sector…  Employment Multiplier  Population Multiplier Rules of Thumb