The Faustmann Redevelopment Cycle

It must have been a very long time since man first discovered that buildings too rise and fall. A forest is planted, harvested, and replanted; a machine built, used and dismantled; and likewise, a site is constructed, occupied, and reconstructed... Perhaps the first systematic analysis of building life cycles was on costs. Surveyors and building economists in the UK first wrote on life cycle costs in the eighties. Yet these analyses focus only on the ‘cost’ side of the problem. Whereas on the ‘benefits’ side, the fact is that rent too tends to decrease, as a building depreciates. There always comes a time when rents are too low, and running costs too high, to maintain. And when such time comes, redevelopment is desirable. This paper tries to apply the Faustmann Condition, which originally analysed the optimal rotation of a forest, to real estate redevelopment cycles. The theoretical solution for optimal time basically equates the marginal benefits and costs in delaying the decision to redevelop. This paper also discusses the potential empirical applications of this theoretical analysis using the concept of a cost-to-rent ratio.