Stickiness of Rental Rates and Developers’ Option Exercise Strategies |
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Authors: | Rose Neng Lai Ko Wang Jing Yang |
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Affiliation: | (1) Department of Finance and Business Economics, Faculty of Business Administration, University of Macau, Taipa, Macau, China;(2) Department of Real Estate, Baruch College (CUNY), New York, NY, USA;(3) Department of Finance, California State University-Fullerton, Fullerton, CA, USA |
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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. Submitted to Cambridge—Maastricht 2005 Symposium. |
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Keywords: | Sticky rents Overbuilding Real options |
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