Commercial leases, terms and options in the light of game theory

Charles-Olivier Amédée-Manesme, Francois Des Rosiers and Philippe Grégoire

ERES from European Real Estate Society (ERES)

Abstract: In this paper, a lease rate valuation model is developed whereby the market rent is subject to binomial movements. We then consider a commercial leasing game where different renters, large and small, find a location in different buildings owned by competing landlords operating under a rent negotiation process. When supply for office space exceeds demand from large firms, the latter always pay an advantageous rent. We demonstrate theoretically that small firms are better off in a building containing a large firm and thus will accept to pay a premium to lodge in such buildings rather than opting for a lower rent in a building occupied by small firms. The conditions leading to opposite results are also discussed in the paper. Using data from New York City, Chicago and Los Angeles, we discuss lease rates in light of the predictions of our theoretical model.

Keywords: Leases; Negotiation; Options; Rent contract (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2017-07-01
New Economics Papers: this item is included in nep-gth
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Persistent link: https://EconPapers.repec.org/RePEc:arz:wpaper:eres2017_175

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