A Real-Option Based Dynamic Model to Simulate Real Estate Developer Behavior

Real estate developers are facing a dynamic and volatile market when making their investment decisions. In this study, a real option-based adaptive formulation is adopted so as to incorporate market uncertainties in simulating developer behaviors such as when, where, what type, and how much built space to build within an agent based, integrated land use and transportation simulation framework. This study extends the traditional discrete choice model based modeling approach by adding an explicit probabilistic representation of development templates available to developers to take into account both developers’ option to hold the land undeveloped and the market volatility of different development types. Model components addressing future revenue prediction, construction cost estimation, market volatility measurement, development template definition, and development template choice are presented. The proposed simulation framework is applied to the private residential housing supply in Singapore as a demonstration. _______________________________________________________ M. Diao Department of Real Estate, National University of Singapore, Singapore Email: [email protected] X. Ma School of Architecture, Southeast University, China Email: [email protected] J. Ferreira Department of Urban Studies and Planning, MIT, USA Email: [email protected] CUPUM 2015 223-Paper