Real Options Analysis for Adaptable Buildings: A Cost and Carbon Analysis

Abstract

There is increasing interest in adaptable building design as spatial needs, market conditions, and performance expectations evolve over time. Uncertainty in future demand requires designers to assess not only the financial implications of expansion strategies, but also their associated carbon impacts from an early stage. This study applies Real Options Analysis (ROA) to evaluate the value of incorporating adaptability into building design and to support decision-making under uncertainty and fluctuations of future demands. A case study of a commercial building in Singapore is used to compare three alternatives: Fixed (a base case retaining the existing building without expansion), Demolish-and-Rebuild (D&R), and Flex (embedding adaptability to permit future expansion at five-year decision intervals). Historical vacancy rate data from 2011 to 2023 were used to estimate demand trends and forecast future occupancy through year 2065. The alternatives were assessed using three metrics: Cost of Construction (CC), Net Present Value (NPV), and Embodied Carbon (EC). Results show positive mean NPV for all alternatives, with Flex achieving the highest mean NPV at approximately SGD 654 million. D&R resulted in the highest mean construction cost (SGD 78.6 million), the highest embodied carbon (8,180 metric tons CO₂e), and the lowest mean NPV (SGD 233 million). While Fixed offered the lowest immediate cost and carbon impact, it underperformed in capturing future growth. Overall, the findings highlight a clear trade-off between short-term certainty and long-term adaptability, emphasizing that embedding adaptability can improve financial performance while reducing the likelihood of future demolition and rebuilding. The study demonstrates the value of ROA methodology as a decision-support tool to navigate this trade-off between immediate cost certainty, long-term value creation, and environmental responsibility in building design.