Economic Fundamentals, Capital Expenditures and Asset Dispositions
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The real estate literature recognizes the real option to invest in capital expenditures (CAPEX) or sell a property but treats these options as independent. We show that these real options are interconnected. We provide empirical evidence that, consistent with the real option framework, CAPEX increases in income growth expectations but declines in their volatility; that CAPEX are partially capitalized into property market values; and that CAPEX signifcantly reduce the subsequent likelihood of sale. We also present evidence that, controlling for market timing, past property performance infuences CAPEX but not disposition choices, consistent with a value-add investment strategy.
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real estate investment; real options; disposition choices
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Ambrose, B. W., & Steiner, E. (2019). Economic fundamentals, capital expenditures and asset dispositions. Journal of Real Estate Finance and Economics. doi: 10.1007/s11146-019-09698-9.
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Required Publisher Statement: © Springer. Reprinted with permission. All rights reserved. Final version published as: Ambrose, B. W., & Steiner, E. (2019). Economic fundamentals, capital expenditures and asset dispositions. Journal of Real Estate Finance and Economics. doi: 10.1007/s11146-019-09698-9.