The Evolution of Real Estate in the Economy
Hu, Dapeng, Pennington-Cross, Anthony, Journal of Real Estate Portfolio Management
Executive Summary. While the economy as a whole has been rapidly changing in response to technological innovation, real estate has evolved from a depository of wealth for households and assets for corporations into a major force in the debt and equity markets. In contrast, the role of real estate as a contributor to the nation's output and income has remained steady at approximately 11% of gross domestic product.
The fast growth of the high tech and Internetrelated industries has changed the landscape of the economy in the United States. In 1999, the economy completed its tenth consecutive year of expansion, marking the longest expansion in history. As a result, the concept of a "New Economy" has become widely accepted. What is the role of real estate in the New Economy? How will the real estate industry change in the future? One approach to answer these questions is to look back in time and examine the patterns of growth and decline of real estate in various parts of the economy.
This article examines economic indicators to depict the evolution of the real estate industry's role in the economy over time. This examination spans the early 1980s through 1999, a period chosen for two reasons. First, important financial innovations in the real estate industry, such as real estate investment trusts (REITs) and mortgage-backed securities (MBS) occurred during this period. Secondly, this was also the period during which we saw the rapid growth of high-tech industries and the formation of dot-com companies.
A few studies have tried to estimate the size of the entire real estate industry or the aggregate value of all real estate assets. Miles, Machi and Hopkins (1994) and Miles and Tolleson (1997) provided estimates of the aggregate value of investable real estate assets in public and private markets. In its America's Real Estate series, the Urban Land Institute (ULI) also has attempted to calculate and publish such a statistic, which incorporates comprehensive data tables of real estate component values. The method used in these articles is a detailed accounting approach. The entire real estate market was divided into two markets, public and private; each of these was further divided into several segments. Data on transactions and flow of funds provided a reasonably accurate estimation of the total value of real estate in public markets. However, documenting the aggregate value of non-- securitized or private market assets is not as straightforward.
This detailed accounting method approach has two disadvantages. First, it requires a huge amount of data, which generally are not available either in cross section or over time. For example, commercial real estate is one of the largest components of the private market. However, there is no direct data information on the market value of real estate held by corporations. In addition, previous studies rely heavily on arbitrarily determined parameters to estimate asset values. These parameters are almost always time invariant. Given that results are sensitive to these key parameters, the lack of time variation limits the usefulness of the results when examining changes across decades. It is not surprising that there is a wide range of estimates reflecting the lack of agreement on the true size of the real estate pie.
Rather than creating one arbitrarily determined aggregate number, our approach is to create several indicators based on more reliable data that reflect several aspects of the real estate industry. The aspects include real estate in gross domestic product (GDP), which reflects the annual flow of value added by the real estate industry; real estate's share in the total wealth of households and businesses; real estate in the debt market, and real estate in the stock market.
Our key conclusions include the following. In terms of the value added in GDP, the role of the real estate industry is quite steady over time. …