Real Estate
SIC 6500
NAICS 531
The real estate industry encompasses a broad range of businesses involved in the development, transfer, and management of real property. Major segments include developers, property managers, and real estate agents and brokers. For discussion of new building construction, see also Construction, Residential Building and Construction, Nonresidential Building.
Historically, real estate has been a cyclical industry in which property values often mirrored the fluctuations and conditions of national and global economies. The U.S. economy suffered a downturn in the early 2000s, and a similar lack of verve held back the real estate market in many other parts of the world, including Latin America and much of the European Union, hitting Germany particularly hard. Certain sectors of the industry performed well, however. In Europe, for example, retail-related real estate transactions flourished. In many respects, real estate continued to be the one bright spot in the U.S. economy, as historically low interest rates led to record home sales in 2002 and 2003. Investors were also lured to real estate in greater numbers, as the stock market continued to give unimpressive returns throughout the early 2000s. The appearance of Real Estate Investment Trusts (REITs) in many markets showed their appeal to investors who could now purchase this type of investment through public exchanges.
The commercial real estate industry became more of a global affair during the boom years of the late 1990s, and the interconnectedness of global capital markets has continued to strengthen. Commercial real estate suffered from falling rents and rising vacancy rates virtually worldwide during the early 2000s. Globalization, lowering of trade barriers, and the easier mobility of capital in the early 2000s also meant that more companies could compete directly for real estate assets. Increased competition tended to keep prices down. Globally, however, conditions in the real estate industry varied widely because of local conditions. But by 2005, countries were again seeing gains in the industry. China, with the world's fastest-growing economy was seeing a tightening of available real estate in many of its popular urban centers, particularly once it allowed foreign investment in many industries. Despite Germany's position as the slowest European country to recover from the economic downturn, the sheer size of its market continued to make it an attractive opportunity for many investors.
Property available for individual or corporate ownership in free-market economies is valued primarily by two factors: the marketplace, which establishes demand, and location, which determines value. Typically, there is a high demand in large cities for office and residential space centrally located in prime work and commercial areas. However, the softening of the economy in the United States and much of the rest of the world in the early 2000s led to slackening demand for just such property, bringing rents and prices down.
Many factors influence demand: access to public transportation, highway, and rail networks or port facilities; income levels of inhabitants; property taxes; access to good schools; employment opportunities; and local economic incentives. While a property may be well located, it is still subject to fluctuations of local, national, and global economies. For example, when localities experience increased crime, non-responsive government, economic downturn, or civic mismanagement, then demand may abate, property values sink, and the local real estate industry may experience a corresponding downturn.
In markets where property is sold or leased by the government, corporations or individual investors work with government officials to effect the transaction. To serve foreign investors or corporations, development boards are established to work as liaisons with authorities. Several of the most aggressive direct investment agencies are the Netherlands Foreign Investment Agency, the Invest in Britain Bureau, and the Hong Kong Industrial Promotion Office. India, which had a growing economy in the early 2000s, does not permit direct foreign investment in real estate. If the Indian government were to change its regulations, India would be a potentially hot growth spot for real estate investment. China, also a growing economy, began to privatize some land ownership in the 2000s. Almost half the direct foreign investment in China in the early 2000s was in real estate.
As the world's economies grow increasingly interconnected through international trade, many governments view locations that offer logistical advantages as increasingly important. These advantanges include road and rail networks and accessibility to seaports and airports. In the United States, many ports sold or leased port-owned property as office and industrial sites to raise funds to upgrade port facilities. Many airports and seaports designated free zones with complete facilities and warehouses through which goods could enter the country duty free for assemblage, packaging, and redistribution.
In the 2000s, security concerns added a whole new layer of complexity to the economics of real estate. The attacks on September 11, 2001, that destroyed the World Trade Center in New York brought a new awareness of vulnerability to the world's other impressive buildings. In the United States, the insurance industry redefined its risk coverage after the attacks on the World Trade Center and in most cases made coverage against terrorist acts a separate category, instead of including it under general risk. Coverage against terrorist attacks was generally not available or only at very high rates. This situation left open the possibility of uninsured buildings being destroyed, and lenders, i.e. banks, being left with no collateral. The issue of terrorism insurance needed to be resolved by the real estate, banking, and insurance industries and by legislatures. This existing issue did not, however, slow the building of skyscrapers in Asia. The world's tallest building, Taipei 101, was completed in 2003 in Taipei, Taiwan. Taipei 101 overtopped the Petronas Towers in Kuala Lampur, Malaysia, completed in 1998. Taipei 101 was not expected to hold the world's record for long, as the Shanghai World Financial Center in Shanghai, China, was expected to be completed in 2007. Work on new skyscrapers carried on in Asia, despite evidence that commercial office space was already in abundant supply.
The spread of technology was changing the face of real estate, both residential and commercial. Buyers and potential buyers in technology-rich nations such as the United States were able to conduct independent research and comparison easily from their own homes. There was a wealth of information available on the Internet, enabling buyers to research communities, school districts, building and property costs, taxes, and any other real estate consideration. Homebuyers could even look online to find houses for sale, most with photos and some with video technology that offers a virtual tour.
Agrarian societies are believed to be the first group to establish property rights. Ancient Greece, and later the Roman Empire, set laws that confirmed this absolute right of ownership. However, with the decline of the Roman Empire and the advent of the Middle Ages, much of European society fell into a period of feudalism wherein a landlord oversaw and owned vast quantities of land. Individuals or "vassals" worked this land on his behalf, paying rent in the form of farm products and labor in exchange for protection. With some notable exceptions, Europe's feudal systems were largely abandoned in the thirteenth century.
The concept of absolute freedom and the rights of the common man did not begin to develop in Europe until the late eighteenth century. No doubt, these ideas were developed through colonial expansionism, which revealed to the Europeans vast amounts of land previously unknown to them.
Development of real estate soared during the late nineteenth and early twentieth centuries, particularly in England and the northeast United States. Multistoried facilities for mass production of automobiles, textile products, and consumer goods were constructed. In turn, these industrial and commercial centers spurred the growth of towns and cities in surrounding regions.
Modern industrial development took on a different focus after World War II. Rapid postwar population growth, coupled with general economic recovery and expansion, spurred the development of both residential and commercial properties in many countries.
In most free-market economies, the 1950s saw an era of entrepreneurship. Small companies spun off from larger corporations. Real estate developers seized such opportunities and, responding to the need to create more commercial and industrial facilities, began building on speculation.
A glut of vacancies resulted in the real estate downturn of the 1970s. Real estate...
To continue reading
Request your trial