Recent empirical research provides evidence on the asset disposition choices of individual and institutional real estate investors that is consistent with the `disposition effect\u27. We propose a value-add investment strategy as an alternative rational explanation for the observed patterns in disposition choices. The main value-add mechanism in real estate investment is capital expenditures. However, capital expenditure investment is a real option whose exercise depends on its moneyness, which is a function of the economic environment. Therefore, we study the links between economic conditions, building-level capital expenditures, and subsequent transactions throughout the real estate cycle. We present empirical evidence consistent with our proposed rational explanation for the alleged disposition effect in real estate asset disposition decisions
