Commercial Real Estate Analysis & Investments

Abstract

The book Commercial Real Estate Analysis & Investments, by David M. Geltner and Norman G. Miller, is reviewed.

Commercial Real Estate Analysis & Investments. David M. Geltner and Norman G. Miller, Florence, KY: South-Western (Thomson Learning), 2001.

Reviewed by: Carlos Slawson, Louisiana State University.

A new real estate textbook written by David M. Geltner and Norman G. Miller appeared in print during the Fall of 2000. The purpose of the textbook, as stated in the preface, is to present a real estate "body of knowledge" at a level that the typical American graduate student can readily understand. The authors carry out this goal using a fresh style that is academically rigorous, yet practically relevant. Using this text, the student is immediately submerged within a solid financial economics framework. Commercial real estate is portrayed as an integrated analysis of corporate finance and investments. Within this framework of core MBA principles, the textbook also attempts to bridge "Wall Street to Main Street," making this textbook an excellent choice for instructors of masters-level real estate courses who desire to provide academic rigor with practical relevance for real estate decision-making.

Organization and Readability

This nearly 900 page textbook contains thirty chapters with the following sections:

1. An Introduction to Real Estate Economics

2. Urban Economics and Real Estate Market Analysis

3. Basic Financial Economic Concepts and Tools

4. Real Estate Investment Analysis & Valuation at the Micro Level

5. Completing the Basic Investment Analysis Picture

6. Mortgages from an Investment Perspective

7. Macro-level Real Estate Investment Issues

8. Real Estate Development and Other Selected Topics.

This textbook is grounded in the commercial real estate decision-making process using principles of financial and urban economics. It is designed to develop and communicate a coherent body of knowledge to address real estate and mortgage valuation and investment issues at a basic or macro level. It may be impossible to cover this textbook in one semester. However, the division of chapters makes it adaptable to many formats.

There are four different levels and types of text, that in some chapters, appear to be an assortment of two-dimensional "hyper-texts." First is the traditional chapter text, comprised of the main flow within each chapter. Second are occasional text boxes. The text boxes are short topics or features alongside the main text that provide additional insight or perspective on some issues. Others ask a research question or discuss a timely issue. For example, some of the titles are "How Are Pension Fund Contributions Effectively Tax-exempt?" (Chapter 15), "Can Portfolio Theory Be Applied Within the Real Estate Portfolio?" (Chapter 21) or "A Simple One-step Version for the NPI Reverse-Engineering Model" (Chapter 25). Third are the footnotes that provide an additional level of depth, particularly in the more technical and theoretical topics. The footnotes are more extensive than in most textbooks. Fourth are the chapter appendices, which cover particularly technical material. If one were to just read the main text, skipping the footnotes and appendices, one would considerably reduce the total word count of the book.

Instructors will also find three other useful features. A section of Answers to Selected Study Problems contains solutions to many of the end of chapter problems including a description of the steps or method if a question involves difficult methodological or theoretical issues. Another feature is the use of asterisks in subheading titles in the Table of Contents and within the chapters to indicate more fatiguing material. A student who skips or skims the asterisked sections can still follow the book. However, some of the chapters (particularly in Section 7) appear to be written more for academics and Ph.D. students than for typical graduate students. Finally, the authors plan to provide overhead transparencies (as Microsoft Word files and possibly as PowerPoint files) for all the chapters, as well as other instructional aids such as test banks and homework problem sets.

Topic Coverage

The text is current in terms of underlying academic theory. The publication dates in the lists of journal references at the end each Section will attest to its timeliness. This is especially evident at the end of Section 7, Macro-level Real Estate Investment Issues.

The authors emphasize underlying principles and fundamental knowledge. Substantial effort was put into the organization of the text. The categorization and the linking to principle ideas are a major strength. Reading any subsection, the reader quickly perceives the obvious integration of various subfields and perspectives. For example, within Chapter 12 Advanced Micro-level Valuation there is a nine-page section, Market Value and Investment Value, that contains the following: How to Measure Investment Value, Joint Use of IV and MV in Decision Making, Watch Out for the IV Sales Pitch and Marginal and Intramarginal Investors: How to Get Positive NPV. Within this section are the well-developed and integrated ideas of opportunity cost of capital, capital markets, first-most and second-most motivated buyer, supply and demand curves in a well-functioning property market (using a schematic picture), market equilibrium and even common sense.

In general, several things stand out. First, a somewhat unique approach of this textbook is the inclusion of urban economics that underlies the space market, which in turn underlies the cash flows, which underlie asset values. Second, the last section treats development and land in considerable depth as an investment. Third, there is substantial coverage at both the micro (individual property or deal) level and the macro (portfolio or multi-property investment entity) level, with both public and private asset markets addressed extensively throughout. In their attempt to "build the bridge between Wall Street and Main Street," the authors include academic theory such as the CAPM and the option pricing model. Problems in periodic returns measurement, e.g., appraisal smoothing, are also included. The book even contains some statistical methodologies such as a repeat sales regression and hedonic value estimation, methodologies that are becoming more important for commercial property as the Internet and e-commerce make more data available.

In a book that offers so much in the way of topic coverage, what is missing? An instructor of real estate investments may want to use supplemental material in two areas. First, there is very little coverage of detailed institutional and legal points. In many of the numerical examples, the authors readily admit that it will be necessary to substitute specific marginal tax rates, both the stated rates for individuals and effective marginal income tax rates of the marginal investors in markets, into the general framework of the problem. Presenting examples in this way is almost necessary given the tendency for Congress frequently to alter tax code. Second, an instructor of a combination real estate/finance//investments course may not find sufficient coverage of housing and residential finance (as implied by the textbook's title).

Summary

In summary, the textbook: (1) provides a solid theoretical foundation of the necessary financial and economic first principles; (2) contains a toolkit of procedures and methodologies for practical decision making; (3) presents the material using detailed and thorough explanations and examples; and (4) organizes the big picture of commercial real estate analysis in a fresh and unique way relevant to modern real estate.

This book is clearly designed for the graduate level. It is an excellent choice for the typical graduate student pursuing an MBA or an MS in urban planning or real estate. Although the authors are not trying to straddle both markets with this textbook, bright undergraduate students should be able to follow the first half of the book fairly well. Various parts should be useful also to real estate Ph.D. students and real estate academics, as well as practitioners. Finally, this textbook could be viewed as a choice reference, making it useful not only now, but also for years to come.