Rutger-Jan Lange and Coen N Teulings

6 April 2021, CEPR Discussion Paper Series

Abstract

Urban structures and urban growth rates are highly persistent. This has far-reaching implications
for the optimal size and timing of new construction. We prove that rational developers postpone
construction not because prospects are gloomy, but because they are bright. The slow mean
reversion in urban growth rates for the Netherlands and the United States (estimated at ∼0.07 per
annum) implies that a substantial share of cities should optimally postpone construction due to
high growth. Observed heterogeneity in floorspace density across cities can be explained not by
differences in population levels, but in growth rates.

Keywords: real options, mean-reverting growth, Irreversible investment, real-estate construction,
urban growth