Posted by: BayAreaComRE | June 14, 2010

Sourced: Is the Price Right? Consider the Replacement Cost

With all of the talk recently on our blog about investments and buildings trading hands, we thought we’d provide some insight for our readers on how investors make a decision to build vs. buy. Over at the National Real Estate Investor website, we uncovered a great “quick and dirty” explanation and analysis of how replacement costs can be used as a basis for establishing the correct pricing for a building, essentially; if an investor could build the asset for a lower price, then why buy it?

“A basic principle of real estate economics holds that new development occurs only when rents justify the costs of development, including a reasonable return to compensate for development risks. This pressure to develop occurs at the point in the market cycle when demand exceeds existing supply such that market rents rise above replacement rents. Development then occurs until the excess demand is satisfied. Typically, the addition of new space to the market overshoots demand, causing vacancy to increase and putting downward pressure on rents. Market rents fall back below replacement rents, removing the incentive for additional new construction until demand again outpaces supply.”

David Lynn, managing director and head of U.S. research and investment strategy with ING Clarion based in New York, the contributor for the article, gives a great apples to apples analysis for any asset, we look at this as a real investment 101.

Click here to get the full story:


  1. Nice Information and so Interesting Blog, and I can learn fron your site, Thanks

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