The Big Picture

The Decision to Renovate or Teardown

Within the neighborhood renewal process, property owners and investors attempt to reverse the decline in housing stock quality and correct market obsolescence through redevelopment. However, since the existing improvements can be redeveloped either in part (renovations) or in whole (teardowns), a choice must be made between these two processes. While renovations and teardowns have been examined by numerous studies as separate phenomena, this study jointly examines these decisions to provide a better understanding of how and where redevelopment occurs. Notably, the results show support for the notion that renovations and teardowns occur in spatial clusters, but further refine this finding in that they tend to occur in separate spatial clusters. Additionally, the implicit market prices of the structural attributes of properties purchased for major renovations are shown to be equivalent to teardown sales, where the property is valued only for the underlying land.

By Kiplan S. Womack, PhD, Assistant Professor of Finance, Graziadio School of Business, Pepperdine University and Henry J. Munneke, University of Georgia, Department of Insurance, Legal Studies, Real Estate April 10, 2014