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Real Estate Development

Paper Session

Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: American Real Estate and Urban Economics Association
  • Chair: Eva Steiner, Cornell University

Do Political Connections Contribute to Urban Economic Growth? Evidence from the Opening of 1,400 Industrial Parks in China

Matthew Kahn
,
Johns Hopkins University and NBER
Weizeng Sun
,
Central University of Finance and Economics
Jianfeng Wu
,
Fudan University
Siqi Zheng
,
Massachusetts Institute of Technology

Abstract

Over the last 30 years, the Chinese government has built more than 1,400 new industrial parks. The provincial leaders who choose the location of such parks have political career incentives to place such parks in locations that increase regional economic growth. They may also choose to allocate such place based infrastructure in order to reward city officials who they are connected to. We document that connected city officials are more likely to receive a park. By exploiting plausibly exogenous changes in political connections, we estimate the heterogeneous urban growth effects of attracting place-based investments.

Land Use Restrictions and the Redevelopment Option across Space and Time

David Leather
,
Chapman University

Abstract

We incorporate uncertainty surrounding future land-use restrictions to empirically assess the option value of redevelopment embedded in real estate prices for New York City (NYC) from 2003-2015. Using a two-stage estimation procedure, we interact predicted probabilities of land-use (re)zoning to either residential, commercial or manufacturing with an additional proxy for the property's redevelopment propensity. Over the period spanning 2003 to 2015, estimates of the average option value to redevelop in Manhattan and Brooklyn are 20% and 8.5% of total estimated property value, respectively. There is also evidence that manufacturing lots identified as likely to be rezoned by the model sell at a premium of up to 50% per square foot. Lastly, there is evidence that the option value as a percentage of the total property value is counter-cyclical.

Is There Super-normal Profit in Real Estate Development?

David Geltner
,
Massachusetts Institute of Technology
Anil Kumar
,
Aarhus University
Alex M. Van de Minne
,
University of Connecticut

Abstract

This paper explores the question of whether real estate development projects systematically present positive net present value (NPV) and therefore, provide super-normal profit. Such projects are the products of a business operation that governs the exercise of the real call option on development that is represented by developable land. We find that super-normal profits do tend to exist in the investment property development projects produced by publicly-traded equity real estate investment trusts (REITs). Specifically, we find that, over the 1998-2018 period, REITs' Tobin's-Q ratios increase significantly as a function of the ratio of development assets to total assets in the firm, controlling for other factors. This added value is net of land cost and is at the firm level, therefore also net of overhead and search costs associated with the real estate development business operation. Our findings suggest either that the commercial real estate development industry tends to be broadly characterized by super-normal profits, or that there is a beneficial capital allocational efficiency effect of the stock market in attracting, supporting or cultivating firms that are particularly successful at real estate development of investment properties.

Land Value Estimation Using Teardowns

Daniel McMillen
,
University of Illinois-Chicago
Ruchi Singh
,
University of Georgia

Abstract

Teardowns provide direct information on land values in fully developed urban areas because such properties are valued only for their land and location rather than for the characteristics of the structure. We use two approaches to estimate land values. The first approach is a Stein-like procedure that uses teardown properties and makes efficient use of limited data when a group of variables – in this case, the structural characteristics – is expected beforehand to provide little explanatory power. The second approach is based on an unconditional expectation for the pooled data set of teardown and non-teardown sales. We use data from Chicago and Maricopa County to demonstrate the two approaches.
Discussant(s)
Christian Redfearn
,
University of Southern California
Timothy Riddiough
,
University of Wisconsin-Madison
Robert Connolly
,
University of North Carolina-Chapel Hill
Christian Cunningham
,
Federal Reserve Bank of Atlanta
JEL Classifications
  • R0 - General