Office Market Dynamics: The Workings of the Amsterdam Office Market

Conventional economic theory dictates that higher vacancy levels should lead to downward price-pressure and lower (real) average office space rent levels. Despite this, the reported average rent levels do not demonstrate the sever price decrease one might expect. Previous studies and inductive reasoning indicate that three main factors might explain this seemingly paradoxical situation. Understanding these factors requires further investigation and are identified in this research: First, the reported rent indexes might not accurately reflect the current price level for the use of office space, because the indexes are not corrected for lease incentives; possibly concealing the downward price effect of the currently higher vacancy rate. Second, the reported vacancy levels might not accurately reflect the prevailing space market condition, because the figure is distorted due to inclusion of outdated supply, which it is not considered a viable accommodation alternative. Finally, the scale of the analysis might not reflect the actual market process. Urban office markets are considered to consist of a system of interrelated submarkets. However, most studies model the market as an unitary – city-wide – office market, ignoring the spatially and functionally segmented structure.This paper investigates the office space supply and rent development relationship, within a rental adjustment framework. For this purpose a lease transaction and supply dataset was collected, spanning the period 2002-2012, in combination with the compilation of an office stock database. For each lease transaction data were collected regarding the (initial) asking rent, initial contract rent and the effective rent (contract rent corrected for lease incentives). Consequently, different rental adjustment models were specified and compared in accordance with the formulated hypothesis; considering the three possible factors effectively concealing the market mechanism.