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Commercial Real Estate Valuation, Development and Occupancy Under Leasing Uncertainty
Author(s) -
Buttimer Richard,
Ott Steven H.
Publication year - 2007
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1540-6229.2007.00181.x
Subject(s) - lease , valuation (finance) , real estate , reservation , economics , property value , property market , hedge , microeconomics , spot contract , occupancy , financial economics , econometrics , actuarial science , finance , futures contract , computer science , computer network , ecology , biology
A model of commercial property valuation is developed where individual property owners are price takers and tenants randomly arrive and depart. Spot lease and tenant reservation prices are stochastic and correlated and can divert from but eventually revert back to market equilibrium. Within this framework we examine built property values and vacancy rates for varying parameter sets representing differing markets and economic conditions. We also examine how potential and existing vacancies, spot lease prices and tenant reservation prices feed back into development decisions. We demonstrate how preleasing acts as a hedge to the developer against the risk of leasing uncertainty.