Job market paper
We take advantage of uncertainty regarding future land use restrictions in order to empirically identify the value of the redevelopment option embedded in real estate prices for New York City (NYC) from 2003-2015. Using a two-stage estimation procedure, ergodic propensities to be zoned to either residential, commercial, or manufacturing land uses are interacted with a proxy for the propensity to be redeveloped. Results show that the option value terms are positive and statistically significant. We estimate the average option value to redevelop in Manhattan & Brooklyn for years 2003-2015 is 20% and 8.5% of total estimated property value respectively. We also find evidence that manufacturing lots identified as residential by the model sell for a premium of 50% per square foot. Lastly, we find evidence that option value as a percentage of total property value is countercyclical with the real estate cycle.
Fields18, 11, 22, Asset Pricing
Impulse Responses in a "Self-Exciting" World