Curvature and contingencies: Pricing lease term risk in commercial real estate

Abstract A long lease secures contractual rent but delays the owner's ability to re‐lease, redevelop, or switch the property to a better use. Across 8293 US single‐tenant transactions, markets price this trade‐off nonlinearly: Cap rates fall steeply through about 20 years of remaining term and then flatten. A stochastic optimal‐stopping model shows why term is most valuable when it protects credible cash flows that would be costly to replace, and why its marginal value falls as discounting and lost flexibility accumulate. Heterogeneity by tenant credit, re‐leasing frictions, market strength, and climate exposure has implications for lease design and portfolio valuation.