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Stickiness of Rental Rates and Developers’ Option Exercise Strategies

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Abstract

In this study we incorporate sticky rents into a real options model to rationalize the widely documented overbuilding puzzle in real estate markets. Given the assumption that developers’ objective function is to maximize total revenue by selecting an optimal occupancy level, our model provides a better explanation of the phenomena we observed in the real world than the traditional market-clearance based real options models. We also show that developers’ exercise strategies can be affected by the size and the type of property markets. In other words, developers’ exercise strategies could differ among markets and under different conditions.

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Authors and Affiliations

  1. Department of Finance and Business Economics, Faculty of Business Administration, University of Macau, Taipa, Macau, China

    Rose Neng Lai

  2. Department of Real Estate, Baruch College (CUNY), New York, NY, USA

    Ko Wang

  3. Department of Finance, California State University-Fullerton, Fullerton, CA, USA

    Ko Wang & Jing Yang

Authors
  1. Rose Neng Lai
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  2. Ko Wang
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  3. Jing Yang
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Correspondence to Rose Neng Lai.

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Submitted to Cambridge—Maastricht 2005 Symposium.

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Lai, R.N., Wang, K. & Yang, J. Stickiness of Rental Rates and Developers’ Option Exercise Strategies. J Real Estate Finan Econ 34, 159–188 (2007). https://doi.org/10.1007/s11146-007-9004-3

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  • DOI: https://doi.org/10.1007/s11146-007-9004-3

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