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Estimation of the Rental Adjustment Process

Listed author(s):
  • Patric H. Hendershott
  • Bryan D. Macgregor
  • Raymond Y.C. Tse

Rental adjustment equations have been estimated for a quarter century. In the U.S., models have used the deviation of the actual vacancy rate from the natural rate as the main explanatory variable, while in the UK, 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 re-estimate 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 UK traditions are special cases of this more general formulation. We next estimate this equation using data from the City of London office market. Our initial specification of this more generalized model is greatly superior to the vacancy rate model. Finally, we estimate a two-equation variant with a separate vacancy rate equation; this model also performs much better than that of HLM. Importantly, our model passes standard modern econometric requirements for unit roots and co-integration.

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Paper provided by European Real Estate Society (ERES) in its series ERES with number eres2001_178.

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Date of creation: 01 Jun 2001
Handle: RePEc:arz:wpaper:eres2001_178
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  1. Arnott, Richard & Igarashi, Masahiro, 2000. "Rent control, mismatch costs and search efficiency," Regional Science and Urban Economics, Elsevier, vol. 30(3), pages 249-288, May.
  2. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107.
  3. Stuart A. Gabriel & Frank E. Nothaft, 1988. "Rental Housing Markets and the Natural Vacancy Rate," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(4), pages 419-429.
  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, vol. 27(2), pages 365-387.
  5. Rosen, Kenneth T & Smith, Lawrence B, 1983. "The Price-Adjustment Process for Rental Housing and the Natural Vacancy Rate," American Economic Review, American Economic Association, vol. 73(4), pages 779-786, September.
  6. 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.
  7. Patric H. Hendershott & Edward J. Kane, 1992. "CAUSES AND CONSEQUENCES OF THE 1980s COMMERCIAL CONSTRUCTION BOOM," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(1), pages 61-70.
  8. William C. Wheaton & Raymond G. Torto, 1988. "Vacancy Rates and the Future of Office Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(4), pages 430-436.
  9. Richard Voith & Theodore Crone, 1988. "National Vacancy Rates and the Persistence of Shocks in U.S. Office Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(4), pages 437-458.
  10. Hendershott, Patric H, 2000. "Property Asset Bubbles: Evidence from the Sydney Office Market," The Journal of Real Estate Finance and Economics, Springer, vol. 20(1), pages 67-81, January.
  11. Shilling, James D. & Sirmans, C. F. & Corgel, John B., 1987. "Price adjustment process for rental office space," Journal of Urban Economics, Elsevier, vol. 22(1), pages 90-100, July.
  12. Arthur A. Eubank & C. R. Sirmans, 1979. "The Price Adjustment Mechanism for Rental Housing in the United States," The Quarterly Journal of Economics, Oxford University Press, vol. 93(1), pages 163-168.
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