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Supply Adjustments to Demand Shocks in the Commercial Real Estate Market

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  • George H. Lentz
  • K.S. Maurice Tse

Abstract

This paper contributes a theoretical investigation of real estate supply adjustments in the commercial real estate market. Simple theoretical linkages between the goods market (the demand side) and the space market (the supply side) are developed and then used to explain the optimal supply decisions of space producers. Propositions relating to how space production decisions are made under conditions of demand certainty, demand uncertainty and free entry are derived from optimization models. Under demand certainty, the adjustment of space supply is shown to be affected by whether an exogenous shock is perceived as mild or disastrous. Under demand uncertainty, construction based on pent‐up demand is shown to be suboptimal.

Suggested Citation

  • George H. Lentz & K.S. Maurice Tse, 1999. "Supply Adjustments to Demand Shocks in the Commercial Real Estate Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 231-262, June.
    • Handle: RePEc:bla:reesec:v:27:y:1999:i:2:p:231-262
    DOI: 10.1111/1540-6229.00773
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