Rent dynamics in the Madrid office market: An approach from cointegration and long run equilibrium

Recent data availability has allowed real estate researchers to dig deeper into the property market dynamics. This is the case of Madrid where, by and large, lessons on office markets have been extracted from the studies of other markets as those of United Kingdom, Germany or US. This paper shows that effectively office space demand is rigid with regard to short term rent variations and that its main driver is the physical space necessity, on which businesses have to accomplish their activities. Equally important is the dynamics of letting rents; they move in response to demand pressures, with the background of a rigid or semi-rigid supply. It means that it is a market where demand determines price adjustments and these, in turn, determine developerís decisions in how much office stock is added. Likewise it has been contrasted that one of the most common used indicators to proxy office supply (Vacancy Rate) is effectively the best benchmark to determine rents and, therefore, is properly used by market players. Further, using cointegration and vector error correction models it is possible to estimate the grade of rents overvaluation or undervaluation existing in the market, with respect to the long term trend. Accordingly, it has been possible to compute a 25% of overvaluation in the Madridís office market in the expansive phase of the years 2000-2001 and a price adjustment process from the bust of the current crisis. However, ending 2011, evidence indicates rent levels still above their fundamental equilibrium. Finally the structural modelling used here has a good statistical adjustment to undertake forecasts of price and occupancy variables.