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The Journal of Real Estate Finance and Economics

, Volume 34, Issue 1, pp 159–188 | Cite as

Stickiness of Rental Rates and Developers’ Option Exercise Strategies

  • Rose Neng Lai
  • Ko Wang
  • Jing Yang
Article

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.

Keywords

Sticky rents Overbuilding Real options 

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of Finance and Business Economics, Faculty of Business AdministrationUniversity of MacauTaipa, MacauChina
  2. 2.Department of Real EstateBaruch College (CUNY)New YorkUSA
  3. 3.Department of FinanceCalifornia State University-FullertonFullertonUSA

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