The real estate literature recognizes the real option to invest in capital expenditures (CAPEX) or sell a property but treats these options as independent. We show that these real options are interconnected. We provide empirical evidence that, consistent with the real option framework, CAPEX increases in income growth expectations but declines in their volatility; that CAPEX are partially capitalized into property market values; and that CAPEX signifcantly reduce the subsequent likelihood of sale. We also present evidence that, controlling for market timing, past property performance infuences CAPEX but not disposition choices, consistent with a value-add investment strategy.
Ambrose, B. W., & Steiner, E. (2019). Economic fundamentals, capital expenditures and asset dispositions [Electronic version]. Retrieved [insert date], from Cornell University, School of Hotel Administration site: https://scholarship.sha.cornell.edu/articles/1175
A previous version of this report can be found here: https://scholarship.sha.cornell.edu/workingpapers/34/
Available for download on Sunday, March 01, 2020