ancient cities

636 Real Estate
Re a l eS t a t e
Real estate is a physical and a financial asset. As a
physical asset, it is fixed in a given place, thereby
grounding the economic, political, and social relations
that create real estate. As a financial asset, it
is mobile and tradable: A real estate project might
be sold on completion with additional transactions
(e.g., sales) likely. Real estate is an important sector
of the economy as large amounts of private and
corporate capital are invested in it. The financial
nature of real estate and its economic importance
make it a theme explored largely by economists
and financial analysts who are interested in analyzing
and understanding real estate performance.
Nonetheless, real estate has major physical or spatial
dimensions that are best exemplified by the
mantra used to describe the source of real estate’s
value: location, location, location.
Theoretical Approaches
Research on real estate has relied on quite different
approaches: neoclassical, structural, and institutional.
The neoclassical approach focuses on the
demand–supply aspects of real estate development
and was dominant until about 1970. Beginning in
the late 1960s and the early 1970s, another set of
approaches emerged. Scholars, drawing on the
writings of Karl Marx, became interested in the
logic of capitalist accumulation as a major factor
in the production of real properties. The forces of
capitalism and its monolithic nature were unpacked
in the 1980s by political economy analyses and
institutional approaches that dealt with the actors
who produce and sustain real estate markets.
Researchers relying on neoclassical approaches
have studied real estate by focusing on market
forces. According to this perspective, in a market
economy, the exchange of products takes place on
the basis of prices determined by the interaction of
supply and demand. In the case of real estate, rent
is the price a tenant pays for occupying a particular
space. The interaction of demand for real estate
and the supply of rental properties determines the
level of rentals. Price is determined by demand, and
supply follows rather than influences demand.
Agents engaging in the real estate process are
assumed to act in unison and react automatically to
the structure of demand. The model implies the
existence of a perfect market and the rapid elimination
of any price differences. Both consumers and
producers seek to maximize utility and profitability
and do so within social, legal, or local constraints.
Authors relying on neoclassical frameworks have
increasingly recognized urban specificity as a major
condition shaping the supply of and demand for land
and property. Thus, markets are actually segmented
into submarkets, such as downtown and suburban.
Moreover, property itself is not homogenous but is
instead heterogeneous. Neither is it easily divisible
into small or uniform units; it exists on unique different
sites, each having its own characteristics.
According to the neoclassical approach, the
density of real estate development is shaped by the
land value gradient or a series of land value gradients.
Transportation lines, which converge at one
location, give rise to what has been referred to as
the peak land value intersection. As a result of
maximum accessibility, land values at the peak
land value intersection are the highest in the city.
Demand for space results in high land costs, which
reflect the potential value of the land if built on to
the maximum allowable extent. In these locations,
the cost of land is the major component of real
estate development. Capital is substituted for land
as large amounts of capital are invested in the erection
of more intensive land uses to compensate for
high land values.
The initial argument of the political economy
approach suggests that, in the long run and in the
absence of profitable investments in the primary
(manufacturing) circuit of capital accumulation,
capital will flow into the secondary circuit, where
capital is deployed in the production of the built
environment. This approach acknowledges the
important role of the state in facilitating real estate
development. Within the political economy
approach, issues of landownership and rent are
emphasized. Instead of the perfect-competition
assumptions built into neoclassical land use models,
this approach emphasizes the power of landowners.
It is suggested that land has a monopolistic character.
This enables landowners to manipulate or control
the land market by charging monopoly rents.
Advocates of institutional approaches argue that
it is essential to understand the institutional forms,
relationships, and practices of the real estate sector.
The starting point is its institutional articulation