Does the Theory of Irreversible Investments Help Explain Movements in Office-Commerical Construction?

Rena Sivitanidou

No 8659, Working Paper from USC Lusk Center for Real Estate

Abstract: Focusing on the relevance of the modern investment theory in explaining movements in office-commercial construction, we attempt to advance existing empirical work in two respects. First,building on recent theoretical advances, we offer an extended empirical model of newconstruction that accounts for the full opportunity cost of irreversible investments in uncertainenvironments. Second, using updated time-series of office-commercial construction across thenation's largest markets, we empirically estimate such a model to (i) explore investmentbehavior during 1982-1998 and (ii) detect differences, if any, in such behavior between the preand post-recession years. Our empirical findings are fully consistent with the theory ofirreversible investments. Such findings highlight both the relevance and relative importance ofuncertainty in underlying demand factors in shaping movements in office-commercialconstruction, while pointing altogether to a more cautionary investment behavior during thepost-recession years.

Keywords: Investment; commercial construction; irreversible investments (search for similar items in EconPapers)
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:luk:wpaper:8659

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