Real Estate Development
Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)
- Chair: Eva Steiner, Cornell University
Land Use Restrictions and the Redevelopment Option across Space and Time
AbstractWe incorporate uncertainty surrounding future land-use restrictions to empirically assess the option value of redevelopment embedded in real estate prices for New York City (NYC) from 2003-2015. Using a two-stage estimation procedure, we interact predicted probabilities of land-use (re)zoning to either residential, commercial or manufacturing with an additional proxy for the property's redevelopment propensity. Over the period spanning 2003 to 2015, estimates of the average option value to redevelop in Manhattan and Brooklyn are 20% and 8.5% of total estimated property value, respectively. There is also evidence that manufacturing lots identified as likely to be rezoned by the model sell at a premium of up to 50% per square foot. Lastly, there is evidence that the option value as a percentage of the total property value is counter-cyclical.
Is There Super-normal Profit in Real Estate Development?
AbstractThis paper explores the question of whether real estate development projects systematically present positive net present value (NPV) and therefore, provide super-normal profit. Such projects are the products of a business operation that governs the exercise of the real call option on development that is represented by developable land. We find that super-normal profits do tend to exist in the investment property development projects produced by publicly-traded equity real estate investment trusts (REITs). Specifically, we find that, over the 1998-2018 period, REITs' Tobin's-Q ratios increase significantly as a function of the ratio of development assets to total assets in the firm, controlling for other factors. This added value is net of land cost and is at the firm level, therefore also net of overhead and search costs associated with the real estate development business operation. Our findings suggest either that the commercial real estate development industry tends to be broadly characterized by super-normal profits, or that there is a beneficial capital allocational efficiency effect of the stock market in attracting, supporting or cultivating firms that are particularly successful at real estate development of investment properties.
Land Value Estimation Using Teardowns
AbstractTeardowns provide direct information on land values in fully developed urban areas because such properties are valued only for their land and location rather than for the characteristics of the structure. We use two approaches to estimate land values. The first approach is a Stein-like procedure that uses teardown properties and makes efficient use of limited data when a group of variables – in this case, the structural characteristics – is expected beforehand to provide little explanatory power. The second approach is based on an unconditional expectation for the pooled data set of teardown and non-teardown sales. We use data from Chicago and Maricopa County to demonstrate the two approaches.
- R0 - General