Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Central Place Theory “5% of...

Real Estate Investments

Central Place Theory

“5% of U.S. land is in urban areas, but 90% of real estate value is in urban areas”

Why???

http://www.texastech.edu/


Location Patterns for City Size Zipf’s Law (a.k.a. the Rank/Size Rule)



Zipf’s Law in Practice



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???



Patterns of City Location

“Large cities tend to be spread out

rather than concentrated.”



Patterns of City Location

“City Rank Changes tend to be

relatively rare, and systematic

rather than random.”



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???



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.

A B C D E



Central Place Theory If CPT holds, why aren’t all companies

headquartered in Wichita, KS???

Limitations1) Multi-dimensional spacing2) Population/economic weightings



2 Dimensional CPT



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?

A B C D E



What Makes Cities Grow? Economic Base

Export (Basic) Sector –

Service (Nonbasic) Sector –

Economic Growth depends…



Forecasting Growth in Cities Estimate Growth by Industry Compare Industry Growth to City Location Quotients:

Where:Nmi = employment in city m, industry I

Nm = total employment (all industries) city m

Ni = national employment, industry I

N = total national employment (all industries)



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:



Multiplier Effects Growth in the export sector…

Employment Multiplier

Population Multiplier

• Rules of Thumb


Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Central Place Theory “5% of...

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