Redevelopment option value for industrial property

Abstract

This paper searches for the property value component due to existence of a redevelopment option. We do an empirical study based on over 6,600 industrial property transactions across United States from 2000 to 2018. This can be seen as a discovery journey of improving the methodology in identifying and evaluating the redevelopment option value embedded in the transaction price of such property traded among investors in the private property market. Starting from simple OLS regression, we observed a reverse causality phenomenon between property sales price and a dummy variable of the intention to redevelop the property, in which the redevelopment flag was associated with lower priced properties. The journey then ended up verifying the improvement in the most advanced methodology that academics on the frontier apply in studying the value of the redevelopment option. This advanced methodology by Buechler et al (2020)1 deploys an empirical analysis strategy using a probit model to develop a redevelopment propensity metric, instead of the dummy variable of redevelopment intention. We apply this methodology to solve the endogeneity problem with the original simple OLS regression, and we find that industrial properties have an average redevelopment probability of 0.22, which generates option value of $5.8/sqft (land), or 19% of the average property price per square foot of land ($30.2/sqft(land)). Comparing our study findings for industrial property with that of the Buechler et al study (2020) which is on all property types, the implication is that on average redevelopment option value tends to be a greater percentage of industrial property value than for the other types of commercial properties. The option value is not necessarily greater in absolute terms, but relative to the value of the property. These results apply on average to all industrial properties, not just to those sold specifically to be redeveloped.