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Estimation of the Rental Adjustment Process


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  • Patric H. Hendershott
  • Bryan D. MacGregor
  • Raymond Y.C. Tse


Rental adjustment equations have been estimated for a quarter century. In the United States, models have used the deviation of the actual vacancy rate from the natural rate as the main explanatory variable, while in the United Kingdom, drivers of the demand for space have dominated the estimation. The recent papers of Hendershott (1996) and Hendershott, Lizieri and Matysiak (HLM 1999) fall into the former category. We reestimate these equations using alternative formulations and present evidence that changes in real interest rates were not capitalized into Sydney and London real land prices. We then derive a model incorporating supply and demand factors within an Error Correction framework and show how the U.S. and U.K. traditions are special cases of this more general formulation. We next estimate a two-equation variant with a separate vacancy rate equation using data from the City of London office market. This model allows calculation of the underlying price (rent) and income (employment) elasticities and explains the data marginally better than the HLM model. Importantly, our model passes standard modern econometric requirements for unit roots and cointegration. Copyright 2002 by the American Real Estate and Urban Economics Association.

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Bibliographic Info

Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 30 (2002)
Issue (Month): 2 ()
Pages: 165-183

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Handle: RePEc:bla:reesec:v:30:y:2002:i:2:p:165-183

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Cited by:
  1. Peter Englund & Ake Gunnelin & Patric H. Hendershott & Bo Soderberg, 2005. "Adjustment in Property Space Markets: Estimates from the Stockholm Office Market," NBER Working Papers 11345, National Bureau of Economic Research, Inc.
  2. Franz Fuerst & Anna-Maija Grandy, . ""Oft Expectation Fails": A Time-Series Analysis of Construction Starts in the London Office Market," Real Estate & Planning Working Papers, Henley Business School, Reading University rep-wp2010-13, Henley Business School, Reading University.
  3. Cheong, Chee Seng & Gerlach, Richard & Stevenson, Simon & Wilson, Patrick J. & Zurbruegg, Ralf, 2009. "Equity and fixed income markets as drivers of securitised real estate," Review of Financial Economics, Elsevier, Elsevier, vol. 18(2), pages 103-111, April.
  4. Zeno Adams & Roland Füss, 2012. "Disentangling the Short and Long-Run Effects of Occupied Stock in the Rental Adjustment Process," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 44(4), pages 570-590, May.
  5. Vanessa Gapriotti Nadalin, 2014. "Residential Vacancy in City Center: The Case of São Paulo," Discussion Papers 1987a, Instituto de Pesquisa Econômica Aplicada - IPEA.
  6. Honglin Wang & Chu Zhang & Weihang Dai, 2013. "Rental Adjustment and Housing Prices: Evidence from Hong Kong's Residential Property Market," Working Papers 012013, Hong Kong Institute for Monetary Research.
  7. V.Atilla Oven & Dilek Pekdemir, 2004. "A comparison between office rent determinants of Istanbul and other major metropolitan areas," ERSA conference papers ersa04p166, European Regional Science Association.
  8. Jonathan Wiley & Justin Benefield & Ken Johnson, 2010. "Green Design and the Market for Commercial Office Space," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 41(2), pages 228-243, August.
  9. Dirk Brounen & Maarten Jennen, 2009. "Local Office Rent Dynamics," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 39(4), pages 385-402, November.
  10. Patric Hendershott & Colin Lizieri & Bryan MacGregor, 2010. "Asymmetric Adjustment in the City of London Office Market," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 41(1), pages 80-101, July.
  11. Maria Ibanez & Anthony Pennington-Cross, 2013. "Commercial Property Rent Dynamics in U.S. Metropolitan Areas: An Examination of Office, Industrial, Flex and Retail Space," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 46(2), pages 232-259, February.
  12. Voigtländer, Michael, 2010. "The Link between the Office Market and Labour Market in Germany," MPRA Paper 23994, University Library of Munich, Germany.
  13. V. Öven & Dilek Pekdemir, 2006. "Office Rent Determinants Utilising Factor Analysis—A Case Study for İstanbul," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 33(1), pages 51-73, August.


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