Adjustment in Property Space Markets: Taking Long‐Term Leases and Transaction Costs Seriously

Abstract

Markets for property space adjust only gradually because tenants and landlords are constrained by long-term leases and transaction and information costs. Not only do rents adjust slowly, but space occupancy, which depends on historical rents, often differs from demand at current rent. This creates "hidden vacancies," vacancies that will develop in the future if market rent and the space demand driver are unchanged. That is, if current rent is greater/lesser than average rent, then hidden vacancies are positive/negative. Moreover, because of hidden vacancies, open vacancies and rent are not mirror images of each other. Thus it is necessary to estimate both rental and vacancy rate adjustment processes. We do this using annual data for Stockholm offices during the 1977-2002 period and simulate the response of rent and vacancies (open and hidden) to an employment shock. Copyright 2008 American Real Estate and Urban Economics Association

Asymmetric Adjustment in the City of London Office Market

“…3 Hendershott et al (2002, hereafter HMT) and Englund et al (2008, hereafter EGHS) utilize a 1 Farrelly and Sanderson (2005) also use only two decades of London data, although theirs (quarterly) cover 1982-2002; Barras (2005) uses data that span 1974-2004 to generate elasticities for use in a simulation model of office supply. 2 The credit crunch has led to a rent and vacancy correction in the City; at end 2008, vacancy rates had risen back to 7% and nominal rents had fallen 17% from their peak values with significant falls in capital values observed.…”

Asymmetric Properties of Office Rent Adjustment

“…Figure 3 displays the time series of vacancy rates; real rent levels and the number of employees in office occupying industries over the period 1990-2007. The Figure shows that the vacancy rate for all MSA's over the study period is often a close mirror image of real rent index despite the disturbing influence of new construction and hidden vacancy rates, as discussed in Englund et al (2008b). Vacancy rates show similar patterns across all MSA's and are characterized by high but steady levels over the years 1988-1994, which was a period characterized by a downturn in the U.S. economy partly due to the collapse of the junk bond market and a credit crunch.…”

“…Sivitanides (1997) and Mourouzi-Sivitanidou (2002) are examples of papers that use data by the same provider which is based on hedonic methodology as employed by Wheaton and Torto (1994) and Webb and Fisher (1996). Englund et al (2008b) create a similar hedonic rent index for Stockholm for the period 1972-2002. Being at the heart of the negotiations and deals provides CB Commercial with a broad set of contract and building details that subsequently enter the office rent index in the form of control variables. The basic rent specification equation is as follows: The TWR rent index which is used in this study exhibits the rent for a five year, 10,000 ft gross rent lease in an existing building which is located in an average area in the MSA.…”

Investigating the dynamics of, and interactions between, Shanghai office submarkets

“…Building upon the work of Hendershott, MacGregor, and Tse (2002) and Englund, Gunnelin, Hendershott, and Soderberg (2008), Hendershott, Lizieri, and MacGregor (2010) use an error correction modelling approach to examine the City of London office market. The paper considers asymmetric responses to shocks in employment and supply.…”