In a market with rising rents and falling vacancy, new construction is likely to:
Correct Answer
B) Increase as returns justify development
Why this is correct: Rising rents and falling vacancy are classic signals of strong market demand and tightening supply. This improves potential returns (net operating income), which justifies new construction as developers respond to profitable opportunities, as noted in the explanation. Why the other choices are wrong: Developers are unlikely to wait for a downturn when current conditions are favorable. Construction does not remain unchanged regardless of conditions; it responds to market signals. While interest rates are a factor, development depends on the balance of supply, demand, and projected returns. Exam tip: Strong rent growth + low vacancy = developer green light. This often leads to the next cycle phase.
Why This Is the Correct Answer
Why this is correct: Rising rents and falling vacancy are classic signals of strong market demand and tightening supply. This improves potential returns (net operating income), which justifies new construction as developers respond to profitable opportunities, as noted in the explanation. Why the other choices are wrong: Developers are unlikely to wait for a downturn when current conditions are favorable. Construction does not remain unchanged regardless of conditions; it responds to market signals. While interest rates are a factor, development depends on the balance of supply, demand, and projected returns. Exam tip: Strong rent growth + low vacancy = developer green light. This often leads to the next cycle phase.
More Market Questions
Building permit data is most useful to an appraiser as:
In the neighborhood life cycle, what characterizes the decline stage?
In which phase of the real estate cycle do rising vacancies first meet a still-growing construction pipeline?
The principle of consistent use prohibits:
Employment in a one-industry town falls 20%. Through what mechanism does housing demand contract?
Frictional vacancy in a rental market refers to:
The principle of opportunity cost applied to real estate means:
A neighborhood with a wide range of property values requires the appraiser to:
In-migration to a metro area increases housing demand primarily by:
Absorption rate expressed in units per month is calculated by:
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