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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

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

Suggested Citation

  • Eduardo S. Schwartz & Walter N. Torous, 2007. "Commercial Office Space: Testing the Implications of Real Options Models with Competitive Interactions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(1), pages 1-20, March.
  • Handle: RePEc:bla:reesec:v:35:y:2007:i:1:p:1-20
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    Cited by:

    1. Yuan Wang & Wei Tang & Shenghua Jia, 2016. "Uncertainty, Competition and Timing of Land Development: Theory and Empirical Evidence from Hangzhou, China," The Journal of Real Estate Finance and Economics, Springer, vol. 53(2), pages 218-245, August.
    2. Jeffrey Stokes, 2012. "The value of the option to preserve farm real estate," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(1), pages 162-175, January.
    3. Nishihara, Michi, 2014. "Preemptive investment game with alternative projects," Economic Modelling, Elsevier, vol. 43(C), pages 124-135.
    4. Jason Barr, 2010. "Skyscrapers and the Skyline: Manhattan, 1895-2004," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 567-597.
    5. repec:fgv:eaespw:01 is not listed on IDEAS
    6. 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.
    7. 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.
    8. Guthrie, Graeme, 2010. "House prices, development costs, and the value of waiting," Journal of Urban Economics, Elsevier, vol. 68(1), pages 56-71, July.
    9. 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.
    10. Nishihara, Michi, 2012. "Real option valuation of abandoned farmland," Review of Financial Economics, Elsevier, vol. 21(4), pages 188-192.
    11. Patric H. Hendershott & Thomas G. Thibodeau & Halbert C. Smith, 2009. "Evolution of the American Real Estate and Urban Economics Association-super-1," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(4), pages 559-598.

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