Real Options Approach for Flexible Building Delivery

There is an increasing supply of obsolete buildings across the U.S. that have surpassed their useful life. These buildings become obsolete, either because of aging systems or shifts in market demand for the services and amenities the building provides. As a result, obsolete buildings have a higher cost of ownership and can have a negative effect on occupant productivity and morale. In the manufacturing sector, the rate of building obsolescence is especially high. Because the buildings in this sector are typically customized for a specific product or manufacturing process, they struggle to accommodate change over their lifetime. One solution to this problem is to make the buildings themselves more flexible. This solution requires an understanding of the types of uncertainty facing the project during design, construction, and operation, as well as the potential options that may become available to the owner if modifications to the building are necessary. This paper presents the results of a real options analysis (ROA) to valuate flexible building strategies in the manufacturing sector, where uncertainty is high. Specifically, we consider three strategies—dedicated, general purpose, and scalable—and develop real options for each strategy related to the variable capacity of the project, project life, and timing of project construction or renovation. We demonstrate that certain strategies ultimately offer owners of manufacturing buildings a higher long-term value when considering uncertainty about the future demand of their products. By recognizing this uncertainty and evaluating potential design strategies with ROA, this research provides decision guidance to owners that will increase use of flexible design strategies and reduce instances of building obsolescence.