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Commercial Office Space: Testing the Implications of Real Options Models with Competitive Interactions

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  • Eduardo S. Schwartz
  • Walter N. Torous
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    Abstract

    We test the implications of real option pricing models with competitive interactions for commercial real estate development. The competitive nature of a local commercial real estate market relies on a Herfindahl ratio derived from individual developers' shares of total office construction in their market. All else being equal, greater competition among local developers is associated with more building starts. Other variables suggested by the real options pricing model, including the volatility of local lease rates, are also found to be statistically important. In addition, we provide evidence consistent with greater competition attenuating the extent to which increases in volatility delay commercial real estate development. Copyright 2007 American Real Estate and Urban Economics Association

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    Bibliographic Info

    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 35 (2007)
    Issue (Month): 1 (03)
    Pages: 1-20

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    Handle: RePEc:bla:reesec:v:35:y:2007:i:1:p:1-20

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    Cited by:
    1. Maria Ibanez & Anthony Pennington-Cross, 2013. "Commercial Property Rent Dynamics in U.S. Metropolitan Areas: An Examination of Office, Industrial, Flex and Retail Space," The Journal of Real Estate Finance and Economics, Springer, vol. 46(2), pages 232-259, February.
    2. Guthrie, Graeme, 2010. "House prices, development costs, and the value of waiting," Journal of Urban Economics, Elsevier, vol. 68(1), pages 56-71, July.
    3. Jeffrey Stokes, 2012. "The value of the option to preserve farm real estate," Journal of Economics and Finance, Springer, vol. 36(1), pages 162-175, January.
    4. Steven Ott & W. Hughen & Dustin Read, 2012. "Optimal Phasing and Inventory Decisions for Large-Scale Residential Development Projects," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 888-918, November.
    5. Nishihara, Michi, 2012. "Real option valuation of abandoned farmland," Review of Financial Economics, Elsevier, vol. 21(4), pages 188-192.
    6. John Clapp & Katsiaryna Bardos & Tingyu Zhou, 2014. "Expansions and Contractions of Major US Shopping Centers," The Journal of Real Estate Finance and Economics, Springer, vol. 48(1), pages 16-56, January.

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