Who Pays for your Coffee? - Location, Location, Location...

At $2.55 (in 2005), a tall appuccino from Starbucks is hardly cheap. But of course, I can afford it. Like any of the people stopping at that cafe, I earn the price of that coffee every few minutes. None of us want to save some money early in the morning getting coffee in incovient location.

The truth is that Starbuck's most advantage is its location on the desire line of thousands of commuters. But who controls that location?

In trying to work out who is going to make all the money , simply remember that there are at least half a dozen competing companies on one side of the negotiating table and on the other side is a landlord who owns the single prime coffee-bar site. Landlord is often plays companies against each other..

So, in reality? if you check the accounting books, few companies are making very good moeny after they pay their rent. (text from Undercover Economist by Tim Hartford)

Now, you can ask me well how does it apply to real estate?

Economy is like engineering, same principles apply to many industries:

1. Stregth from Scarcity - the person in possession of the desired resource- may or may not have as much much power as one would assume. For instance, particurlar neighborhood od Salt Lake City might be very popular and prestigious to live in now (AND, therefore, price stay stabally high there), but in few years- the new place can get more attention. So, scarcity can certainly shifts with many reason; one of them nowdays, can be the cost of gas... If it is getting so expensive to travel, and people are not good yet to use public trasportation, then certainly downtowns become more and more attractive option to live especially if your office/work is located here.

2. Different Reasons for High Rent - for instance, there are no not many apratments overlooking Central Park in NYC or Hyde Park in London. Because so many people want them, those apratments always stay expensive, so some people would stop wanting, and can only fream about them.

3. In other industries it is not shrinking demand but powerful employers that curtail the poer of unions. In the United States, Wal-Mart has a tremendous bargaining power, and there are only two unionized shops in North America; after the branck in Quebec went union, it got closed. There is a huge shortage of teachers in United Kingdom, but government being a single employer controls the rise of salaries.

Imagine, what can possibly happen with new construction costs: if the price to deliver product (gas goes up) is higher, the price to produce material and union of workers - we will see and already see the new prices of construction even though the house economy may not support it yet...

So, sometimes, you can have power from scarcity, but not in cases where government or powerful employers have more.