Commercial Office Space: Tests of a Real Options Model with Competitive Interactions

21 Pages Posted: 8 Dec 2003

See all articles by Walter N. Torous

Walter N. Torous

Massachusetts Institute of Technology

Eduardo S. Schwartz

Simon Fraser University (SFU); University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Date Written: February 2003

Abstract

We test a real options model with competitive interactions using an extensive commercial real estate data base. The competitive nature of the local real estate market as proxied by the market's Herfindahl ratio is found to have a significant effect on building starts: larger values of the Herfindahl ratio, consistent with less competition, are associated with fewer building starts. In particular, a one standard deviation increase in this ratio leads to a 25.9% decrease in the number of new building starts. Other variables suggested by the real options model, such as the volatility of local lease rates, are also found to be important.

Suggested Citation

Torous, Walter N. and Schwartz, Eduardo S., Commercial Office Space: Tests of a Real Options Model with Competitive Interactions (February 2003). AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=471580 or http://dx.doi.org/10.2139/ssrn.471580

Walter N. Torous

Massachusetts Institute of Technology ( email )

Center for Real Estate and Sloan School
Cambridge, MA 02138
United States

Eduardo S. Schwartz (Contact Author)

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1953 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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