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Supply Constraints and Search Equilibrium in Office Markets

Author

Listed:
  • Gianluca Marcato

    (University of Reading)

  • Lok Man Michelle Tong

    (University of Reading)

Abstract

We present a new conceptual framework to estimate office supply elasticity, where net business survival, physical and economic mismatch are used to identify frictional and structural vacancy. Alongside regulatory and geographical constraints, we also find an unobserved feature of supply elasticity linked to natural vacancy. Our results confirm that US Metropolitan Statistical Areas are generally supply inelastic and the search and matching process plays a key role in supply dynamics. In the least inelastic markets, investors tend to be more flexible to respond to negative demand shocks. As a result, we observe a reduction in structural vacancy and a subsequent increase in cyclical vacancy given the slow short-term movement in absorption. These findings also shed light upon office market dynamics during the COVID-19 period.

Suggested Citation

  • Gianluca Marcato & Lok Man Michelle Tong, 2025. "Supply Constraints and Search Equilibrium in Office Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 70(2), pages 378-428, February.
    • Handle: RePEc:kap:jrefec:v:70:y:2025:i:2:d:10.1007_s11146-023-09955-y
    DOI: 10.1007/s11146-023-09955-y
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    More about this item

    Keywords

    Supply elasticity and Constraints; Structural Vacancy; Frictional Vacancy; Commercial Real Estate; Search Equilibrium; COVID-19;
    All these keywords.

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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