A model of the real estate market is developed where the rent-vacancy trade-off also embeds selections on expenses. High expenses and rents or low expenses and rents are explicit strategies, positioning properties along an efficient isoprofit frontier. Instead of a rent-vacancy trade-off, the operator can select either gross or net rent, or some combination as an offset for vacancy. This macrostructure is more in keeping with observed real estate markets, where some managers focus on net operating income, and others on effective gross income. Empirical results for apartments in Portland, Oregon supports the hypothesis that expenses and rents are positively correlated. An aggressive expense-increasing strategy pays off in higher rents, though in not all cases is net operating income positive. There are two implications. First, incentives in management create strategies to maximize gross as opposed to net income. Second, rent-vacancy trade-offs that use gross income may misstate the adjustment toward equilibrium.
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Find related papers by JEL classification: L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
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David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990.
"Speculative Dynamics,"
NBER Working Papers
3242, National Bureau of Economic Research, Inc.
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Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990.
"Speculative Dynamics,"
Working papers
544, Massachusetts Institute of Technology (MIT), Department of Economics.
Cutler, David M & Poterba, James M & Summers, Lawrence H, 1991.
"Speculative Dynamics,"
Review of Economic Studies,
Blackwell Publishing, vol. 58(3), pages 529-46, May.
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