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Leasing as a Lottery: Implications for Rational Building Surges and Increasing Vacancies

  • Joseph Gyourko
  • Richard Voith

An expanded inventory demand framework is developed that focuses on the impacts of changes in the local leasing environment. We model the lease-up process as a lottery in which changes in turnover or absorption affect the probability of winning the leasing lottery. In this context, builders rationally respond to transitory, not just permanent, changes in the local market. Hence, factors such as temporary shocks to tenant turnover affect the decision to build. The magnitude of turnover-induced cycles can vary across markets depending upon the vintage of the existing building stock, the local absorption rate and the rent elasticity of demand for space. This framework, which refocuses attention on the local determinants of the developer's decision to build, hopefully will prove fruitful in future empirical efforts to explain development and vacancy behavior during the past decade. Copyright American Real Estate and Urban Economics Association.

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

Volume (Year): 21 (1993)
Issue (Month): 1 ()
Pages: 83-106

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Handle: RePEc:bla:reesec:v:21:y:1993:i:1:p:83-106
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