An Investment Analysis and Decision Making Framework for Real Estate Development*

Charles H. Wurtzebach and Kee S. Kim

Real Estate Economics, 1979, vol. 7, issue 3, 410-426

Abstract: Recent research analyzing real estate investment decisionmaking has concentrated upon existing income properties. Projects planned for future development have been analyzed as though they were completed and generating rental income. Such analysis has not considered the impact of development period decisions upon operating cash flow and hence project value. This paper proposes a framework for investment analysis which accurately reflects the interrelatedness of the development and operating periods of the real estate development process. A stochastic Markov process is used to develop a model which treats the development and operating periods as an integrated system. The resulting model allows project investment decisions to be made on the basis of a minimum expected profitability index distribution and/or terminal value.

Date: 1979
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