Option value and the price of teardown properties

Abstract

The introduction of uncertainty over the future price of structural capital into a model of teardowns implies a value to delaying the demolition vs. preservation decision, and that the market price of a redeveloped property may increase with its quantity of structural capital. Using data from an active teardown market, we test the model’s prediction that hedonic price function coefficients depend on the expected time between sale and demolition. As predicted, structural variables have significant effects on the sales prices of both teardown and non-teardown properties, and the effects are generally much larger the lower the estimated teardown probability.