Real options in real estate

The ownership of real estate comes with different types of flexibility. Land development, for instance, can be postponed, the use of a building can be changed, rents can be adjusted, and lease contracts can be extended or terminated. This chapters provides an introduction into real option models that consider these different types of flexibility. The models are introduced in a simple discrete time framework. The presentation places economic intuition at its centre. This is followed by a more technical discussion of continuous time models. Equipped with an understanding of these models, the chapter discusses studies that test real option models with data from real estate applications.