The Economics of Commercial Real Estate Preleasing

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Preleasing of to-be-built commercial real estate space is a pervasive worldwide practice. Although such preleasing is an extensive and significant activity, it has not received adequate attention in the real estate economics and finance literature. Using an equilibrium micro-economic agency model, this paper examines the economics of commercial real estate preleasing. The equilibrium prelease contract rent is a function of several variables, including the expected spot market rent, financing benefits from preleasing, developer-lessor and tenant-lessee risk-hedging behavior, the interplay between lessor and lessee default options, and the market capitalization rate. Our paper demonstrates how the distribution of risk preferences for lessees (and lessors) generates separating market equilibrium for the prelease and spot lease. We also consider the impacts of developer default and the lessee cancellation clause on the prelease rent equilibrium.

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2016-08-01
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prelease; rental price risk; leasing; commercial real estate; capitalization rate
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Edelstein, R. H., & Liu, P. (2016). The economics of commercial real estate preleasing. Journal of Real Estate Finance and Economics, 53(2), 200-217. doi: 10.1007/s11146-015-9515-2
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https://hdl.handle.net/1813/70899
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Required Publisher Statement: © Springer. Final version published as: Edelstein, R. H., & Liu, P. (2016). The economics of commercial real estate preleasing. Journal of Real Estate Finance and Economics, 53(2), 200-217. doi: 10.1007/s11146-015-9515-2 Reprinted with permission. All rights reserved.
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