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A Real-Options-Aware Multi-Criteria Framework for Ex-Ante Real Estate Redevelopment Use Selection

Roberto Garrone

TL;DR

This paper tackles the persistent underperformance of real estate assets by identifying a structural misalignment between intended use and market demand. It introduces a Real-Options-Aware MCDA framework that screens ex-ante potential redevelopment uses, integrating irreversibility, managerial complexity, and time-to-income within a comparative decision matrix. The main contributions are an ex-ante exclusion approach, explicit risk decomposition into market and operational components, and case-based illustrations showing how early screening reduces misalignment across asset types and urban contexts. The framework offers a practical path for asset owners, developers, and policymakers to protect value under structural uncertainty by prioritizing coherent uses and preserving strategic flexibility before feasibility and design commitments are made.

Abstract

A growing share of the existing real estate stock exhibits persistent underperformance that can no longer be explained by cyclical market phases or inadequate maintenance alone. In many cases, technically recoverable assets located in non-marginal contexts fail to generate economic value consistent with the capital immobilized. This condition reflects a structural misalignment between intended use and effective demand rather than episodic market weakness, and calls for a decision framework capable of integrating value, risk, complexity, and irreversibility in strategic use selection. This study proposes a decision-analytic framework for the ex-ante selection of intended use in real estate redevelopment processes. The framework integrates real-options logic on irreversibility and managerial flexibility with a multi-criteria decision-analysis structure, enabling comparative evaluation of expected economic value, market and operational risk, technical and managerial complexity, and time-to-income. By treating redevelopment primarily as a problem of strategic option selection rather than design or financial optimization, the framework operationalizes option value preservation through disciplined ex-ante screening. Illustrative cases demonstrate how this integration of real options reasoning and MCDA reduces over-complexification and misalignment across different asset types and urban contexts.

A Real-Options-Aware Multi-Criteria Framework for Ex-Ante Real Estate Redevelopment Use Selection

TL;DR

This paper tackles the persistent underperformance of real estate assets by identifying a structural misalignment between intended use and market demand. It introduces a Real-Options-Aware MCDA framework that screens ex-ante potential redevelopment uses, integrating irreversibility, managerial complexity, and time-to-income within a comparative decision matrix. The main contributions are an ex-ante exclusion approach, explicit risk decomposition into market and operational components, and case-based illustrations showing how early screening reduces misalignment across asset types and urban contexts. The framework offers a practical path for asset owners, developers, and policymakers to protect value under structural uncertainty by prioritizing coherent uses and preserving strategic flexibility before feasibility and design commitments are made.

Abstract

A growing share of the existing real estate stock exhibits persistent underperformance that can no longer be explained by cyclical market phases or inadequate maintenance alone. In many cases, technically recoverable assets located in non-marginal contexts fail to generate economic value consistent with the capital immobilized. This condition reflects a structural misalignment between intended use and effective demand rather than episodic market weakness, and calls for a decision framework capable of integrating value, risk, complexity, and irreversibility in strategic use selection. This study proposes a decision-analytic framework for the ex-ante selection of intended use in real estate redevelopment processes. The framework integrates real-options logic on irreversibility and managerial flexibility with a multi-criteria decision-analysis structure, enabling comparative evaluation of expected economic value, market and operational risk, technical and managerial complexity, and time-to-income. By treating redevelopment primarily as a problem of strategic option selection rather than design or financial optimization, the framework operationalizes option value preservation through disciplined ex-ante screening. Illustrative cases demonstrate how this integration of real options reasoning and MCDA reduces over-complexification and misalignment across different asset types and urban contexts.
Paper Structure (80 sections, 8 equations, 3 figures, 2 tables)

This paper contains 80 sections, 8 equations, 3 figures, 2 tables.

Table of Contents

  1. Introduction
  2. Literature Review
  3. Real Options and Irreversible Investment Decisions
  4. Multi-Criteria Decision Analysis in Complex Investment Contexts
  5. Integrating Real Options and MCDA for Ex-Ante Use Selection
  6. Structural Context of the Real Estate Market
  7. Functional Obsolescence of the Existing Stock
  8. Evolution of Demand
  9. Implications for Value Creation
  10. Assets with Unrealized Potential
  11. Operational Definition
  12. Recurring Typologies
  13. Common Valuation Errors
  14. Alternative Uses: A Critical Overview
  15. Advanced Living
  16. ...and 65 more sections

Figures (3)

  • Figure 1: Conceptual scheme of structural underperformance in existing real estate assets
  • Figure 2: Logical architecture of the decision-making framework for use selection. The process is structured in sequential levels, with progressive reduction of optionality and control of irreversibility.
  • Figure 3: Stage-based decision sequence with stop criteria (kill criteria) in preliminary phases