Intrinsic Real Option Value: Empirical Evidence from Commercial Real Estate Investors

41 Pages Posted: 13 Nov 2020

See all articles by Simon Büchler

Simon Büchler

Massachusetts Institute of Technology (MIT), Center of Real Estate; University of Bern

Alex Van de Minne

University of Connecticut - School of Business

Olivier Schöni

University of Bern

Date Written: November 13, 2020

Abstract

We investigate how local information externalities affect investments in tangible durable assets via real options. Using geocoded transaction-level data on US commercial properties from 2000 to 2018, we find that investors have a higher propensity to invest in a property for immediate redevelopment when its capital intensity and type of commercial activity differ from those of recently built nearby properties. Information externalities affect 'buy-to-redevelop' investment strategies as much as the asset capital depreciation - a main determinant of real option exercise highlighted in the literature - and can increase up to 30 percent the investors' willingness to pay to invest in the property.

Keywords: Real option, intrinsic option value, tangible assets, real estate investments

JEL Classification: R33, G12

Suggested Citation

Büchler, Simon and Van de Minne, Alex and Schöni, Olivier, Intrinsic Real Option Value: Empirical Evidence from Commercial Real Estate Investors (November 13, 2020). MIT Center for Real Estate Research Paper No. 10, Available at SSRN: https://ssrn.com/abstract=3729930 or http://dx.doi.org/10.2139/ssrn.3729930

Simon Büchler (Contact Author)

Massachusetts Institute of Technology (MIT), Center of Real Estate ( email )

United States

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland
3001 (Fax)

Alex Van de Minne

University of Connecticut - School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Olivier Schöni

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland

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