Redevelopment Option Value for Commercial Real Estate

We analyze the impact of the redevelopment potential on commercial real estate transaction prices. First, using a probit model, we compute the fitted redevelopment potential. This potential is primarily determined by the difference in net operating income (NOI) per square foot of land (sql) to the potential highest and best use (HBU) of the property. This difference reflects the economic obsolescence of a property. Second, we run a 2SLS model with the fitted redevelopment potential as an instrument for the redevelopment dummy. We find that having a 100 percent redevelopment potential increases the property's price by nine to 17 percent