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The Rising Natural Vacancy Rate In The German Office Market And Its Effects On Real Estate Finance

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  • Carsten Lausberg

Abstract

In this paper we argue that financial institutions are generally not well prepared for an increasing natural vacancy rate and offer some solutions that may help to reduce the negative effects in the future. Before doing so, we thoroughly investigate the development of the prevailing or current vacancy rates and the equilibrium or natural vacancy rates in the German office market on the city-/county-level and on aggregated levels since 1990. We construct a model to determine the natural vacancy rates, which is in line with the real estate literature (Rosen and Smith (1983), Wheaton and Torto (1988), Sivitanides (1997)). In contrast to previous studies, however, we differentiate between the ìnaturalî vacancy rate, which mostly represents the base vacancy needed for a functioning real estate market plus a cyclical component, and ìstructuralî vacancy, which is an irreversible result of long-term structural changes of the society, the e conomy, or the real estate market. This distinction can help to better understand the mechanisms and perspectives of the real estate market, especially in regions with grave structural problems. After that we show that the standard instruments used by banks in their internal ratings (property valuations and cash flow models) cannot cope with a rising natural vacancy rate and should be adjusted and broadened.

Suggested Citation

  • Carsten Lausberg, 2008. "The Rising Natural Vacancy Rate In The German Office Market And Its Effects On Real Estate Finance," ERES eres2008_190, European Real Estate Society (ERES).
  • Handle: RePEc:arz:wpaper:eres2008_190
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    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2008-190
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    Cited by:

    1. Kevin Muldoon-Smith & Paul Greenhalgh, 2017. "Situations Vacant: A Conceptual Framework for Commercial Real Estate Vacancy," ERES eres2017_341, European Real Estate Society (ERES).

    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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