Timing and intensity of irreversible investment: The case of real estate

This paper studies the problem of irreversible investment in the area of real estate. The paper first reviews the former literature and points out that the traditional real option approach may focus on a competitive firm, assuming exogenous stochastic processes of the output price and factor prices, which is unreasonable in a real estate market. This article models the developer's decisions in the framework of the real option and derives the optimal timing and intensity of development of a certain real estate project, assuming that the developer has monopoly power in a real estate submarket. The results show that not only uncertainty but also demand lead to defer of real estate development.