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

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.