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Adjustment in Property Space Markets: Estimates from the Stockholm Office Market

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  • Peter Englund
  • Ake Gunnelin
  • Patric H. Hendershott
  • Bo Soderberg

Abstract

Markets for property space adjust only gradually because tenants are constrained by long-term leases and landlords and tenants face transactions and information costs. Not only do rents adjust slowly, but space occupancy may differ from demand at current rent, giving rise to %u201Chidden vacancies%u201D. We estimate the joint dynamics of office rents and vacancies using an error-correction model using a new lease rent series for Stockholm offices 1977­2002 estimated on 2,500 leases. It takes 5-10 years for the market to adjust to a shock. In a model simulation of a positive employment shock open vacancies fall from the natural level of 7 percent to below 4 percent, while hidden vacancies increase by about as much. Most of the variation in hidden vacancies over time is explained by the difference between demand at current and average rent on existing leases, which we calculate using data on contract lease length.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11345.

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Date of creation: May 2005
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Publication status: published as Peter Englund & �ke Gunnelin & Patric H. Hendershott & Bo Söderberg, 2008. "Adjustment in Property Space Markets: Taking Long-Term Leases and Transaction Costs Seriously," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(1), pages 81-109, 03.
Handle: RePEc:nbr:nberwo:11345

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  1. Englund, Peter & Gunnelin, Åke & Hoesli, Martin & Söderberg, Bo, 2002. "Implicit Forward Rents as Predictors of Future Rents," SIFR Research Report Series, Institute for Financial Research 12, Institute for Financial Research.
  2. Gunnelin, Ake & Soderberg, Bo, 2003. "Term Structures in the Office Rental Market in Stockholm," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 26(2-3), pages 241-65, March-May.
  3. Wheaton William C. & Torto Raymond G., 1994. "Office Rent Indices and Their Behavior over Time," Journal of Urban Economics, Elsevier, vol. 35(2), pages 121-139, March.
  4. Patric H. Hendershott & Colin M. Lizieri & George A. Matysiak, 1999. "The Workings of the London Office Market," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 27(2), pages 365-387.
  5. Silver, M & Goode, M, 1990. "Econometric forecasting model for rents in the British retail property market," Omega, Elsevier, Elsevier, vol. 18(5), pages 529-539.
  6. Richard Arnott, 1988. "Housing Vacancies, Thin Markets, and Idiosyncratic Tastes," Working Papers, Queen's University, Department of Economics 722, Queen's University, Department of Economics.
  7. Hendershott, Patric H., 1996. "Rental Adjustment and Valuation in Overbuilt Markets: Evidence from the Sydney Office Market," Journal of Urban Economics, Elsevier, vol. 39(1), pages 51-67, January.
  8. Webb, R. Brian & Fisher, Jeffrey D., 1996. "Development of an Effective Rent (Lease) Index for the Chicago CBD," Journal of Urban Economics, Elsevier, vol. 39(1), pages 1-19, January.
  9. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(6), pages 1270-92, December.
  10. Hendershott, Patric & MacGregor, Bryan & White, Michael, 2002. "Explaining Real Commercial Rents Using an Error Correction Model with Panel Data," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 24(1-2), pages 59-87, Jan.-Marc.
  11. Patric H. Hendershott & Bryan D. MacGregor & Raymond Y.C. Tse, 2002. "Estimation of the Rental Adjustment Process," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 30(2), pages 165-183.
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