Structural Dynamics of the Office Sector

This paper uniquely discovers the steady state as well as the general equilibrium dynamics and structure behind the case behavior of Singaporeís Central Area office sector, specifically in terms of its net space absorption, rent and capitalization (cap) rate. Domestic and foreign investors are enabled to better evaluate their decision-making in commercial real estate investing, particularly in anticipating office rents, capital values, and the risks of investing. This paper develops 3 unique and rigorous structural, expectation-augmented and error-corrected stock-flow adjustment models, under the error-correction-model approach, for net office space absorption, rent and cap rate. Model estimation for the office net space absorption achieves a good fit, with the office rental estimation achieving a very good fit, both in conjunction with the appropriate log forms and serial error correction. Inflation volatility is found to be insignificant and excluded while all other causal variables are significant in relation to the cap rate. All the models on the whole exhibit well-behaved residuals. The Akaike and Schwarz information criteria, which tests for appropriate model selection in order to strike a balance between the goodness of fit and parsimony for the key causal factors of interest, are not excessive for all 3 structural models. It is inferred through the model results that Singaporeís island-state economy is dependent on exogenous factors influencing the trade, industrial, financial and business services sectors that in turn drive the demand for the office sector island-wide.