Real estate development as an option

Abstract

Subject to legal limitations, the owner of undeveloped real estate can determine both the date and density at which to develop his property. Alternatively, he can abandon his property. The value of these options depends partly on the stochastic evolution through time of the operating revenues and construction costs of developed property. In this paper the option pricing problem is solved analytically and numerically for the optimal data and density of development, the optimal date of abandonment, and the resulting market values of the developed and undeveloped properties.