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Does the Theory of Irreversible Investments Help Explain Movements in Office-Commercial Construction?


  • Rena Sivitanidou
  • Petros Sivitanides


Focusing on the relevance of the modern investment theory in explaining movements in office-commercial construction, we attempt to advance existing empirical work in two respects. First, building on recent theoretical advances, we offer an extended empirical model of new construction that takes into account the full opportunity cost of irreversible investments in uncertain environments. Second, using updated time series of office-commercial construction across the nation's largest markets, we empirically estimate such a model to (i) explore investment behavior during 1982-1998 and (ii) detect differences, if any, in such behavior between the pre- and post-recession years. Our empirical findings are fully consistent with the theory of irreversible investments. Such findings highlight both the relevance and the relative importance of uncertainty in underlying demand factors in shaping movements in office-commercial construction, while pointing altogether to more cautionary investment behavior during the post-recession years. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • Rena Sivitanidou & Petros Sivitanides, 2000. "Does the Theory of Irreversible Investments Help Explain Movements in Office-Commercial Construction?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(4), pages 623-661.
  • Handle: RePEc:bla:reesec:v:28:y:2000:i:4:p:623-661

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    Cited by:

    1. Colin Lizieri, 2008. "International Financial Centres, Office Market Rents And Volatility," ERES eres2008_197, European Real Estate Society (ERES).
    2. Charles Ka Yui Leung & Patrick Wai Yin Cheung & Erica Jiajia Ding, 2008. "Intra-metropolitan Office Price and Trading Volume Dynamics: Evidence from Hong Kong," International Real Estate Review, Asian Real Estate Society, vol. 11(2), pages 47-74.
    3. Maria Christidou & Stilianos Fountas, 2017. "Uncertainty in the housing market: Evidence from the US states," Discussion Paper Series 2017_08, Department of Economics, University of Macedonia, revised Aug 2017.
    4. William Miles, 2009. "Irreversibility, Uncertainty and Housing Investment," The Journal of Real Estate Finance and Economics, Springer, vol. 38(2), pages 173-182, February.
    5. 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.
    6. repec:kap:jrefec:v:55:y:2017:i:1:d:10.1007_s11146-016-9560-5 is not listed on IDEAS
    7. Hovhannisyan, Vardges & Bozic, Marin, 2016. "The Relationship Between Price And Market Structure: Evidence From The Us Food Retail Industry," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 236222, Agricultural and Applied Economics Association.
    8. Yuming Fu & Maarten Jennen, 2009. "Office Construction in Singapore and Hong Kong: Testing Real Option Implications," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 39-58, January.
    9. Brasington, David M., 2017. "School spending and new construction," Regional Science and Urban Economics, Elsevier, vol. 63(C), pages 76-84.

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