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Leasing as a lottery: implications for rational building surges and increasing vacancies

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  • Joseph Gyourko

  • Richard Voith

Abstract

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.
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Suggested Citation

  • Joseph Gyourko & Richard Voith, 1992. "Leasing as a lottery: implications for rational building surges and increasing vacancies," Working Papers 92-10, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:92-10
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    Cited by:

    1. is not listed on IDEAS
    2. Rena Sivitanidou, 1999. "Does the Theory of Irreversible Investments Help Explain Movements in Office-Commerical Construction?," Working Paper 8659, USC Lusk Center for Real Estate.
    3. Hovhannisyan, Vardges & Bozic, Marin, "undated". "The Relationship Between Price And Market Structure: Evidence From The Us Food Retail Industry," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236222, Agricultural and Applied Economics Association.
    4. Rena Sivitanidou, 1999. "Office Rent Processes: The Case of U.S. Metropolitan Markets," Working Paper 8664, USC Lusk Center for Real Estate.

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