An Equilibrium Analysis of Real Estate

Steven R. Grenadier

No 9475, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper provides a unified equilibrium approach to valuing a wide variety of commercial real estate lease contracts. Using a game-theoretic variant of real options analysis, the underlying real estate asset market is modeled as a continuous-time Nash equilibrium in which developers make construction decisions under demand uncertainty. Then, using the economic notion that leasing simply represents the purchase of the use of the asset over a specified time frame, I use a contingent-claims approach to value many of the most common real estate leasing arrangements. In particular, the model provides closed-form solutions for the equilibrium valuation of leases with options to purchase, pre-leasing, gross and net leases, leases with cancellation options, ground leases, escalation clauses, lease concessions and sale-leasebacks.

JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2003-02
New Economics Papers: this item is included in nep-cfn and nep-ure
Note: AP
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Citations: View citations in EconPapers (4)

Published as Grenadier, Steven R. "An Equilibrium Analysis of Real Estate Leases." The Journal of Business 78, 4 (2005).

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