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Adjustment in Property Space Markets: Estimates from the Stockholm Office Market

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  • Peter Englund
  • Ake Gunnelin
  • Patric H. Hendershott
  • Bo Soderberg

Abstract

Markets for property space adjust only gradually because tenants are constrained by long-term leases and landlords and tenants face transactions and information costs. Not only do rents adjust slowly, but space occupancy may differ from demand at current rent, giving rise to "hidden vacancies". We estimate the joint dynamics of office rents and vacancies using an error-correction model using a new lease rent series for Stockholm offices 1977--2002 estimated on 2,500 leases. It takes 5-10 years for the market to adjust to a shock. In a model simulation of a positive employment shock open vacancies fall from the natural level of 7 percent to below 4 percent, while hidden vacancies increase by about as much. Most of the variation in hidden vacancies over time is explained by the difference between demand at current and average rent on existing leases, which we calculate using data on contract lease length.

Suggested Citation

  • Peter Englund & Ake Gunnelin & Patric H. Hendershott & Bo Soderberg, 2005. "Adjustment in Property Space Markets: Estimates from the Stockholm Office Market," NBER Working Papers 11345, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11345
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    References listed on IDEAS

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    1. Silver, M & Goode, M, 1990. "Econometric forecasting model for rents in the British retail property market," Omega, Elsevier, vol. 18(5), pages 529-539.
    2. Peter Englund & Åke Gunnelin & Martin Hoesli & Bo Söderberg, 2004. "Implicit Forward Rents as Predictors of Future Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(2), pages 183-215, June.
    3. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1270-1292, December.
    4. Hendershott, Patric H., 1996. "Rental Adjustment and Valuation in Overbuilt Markets: Evidence from the Sydney Office Market," Journal of Urban Economics, Elsevier, vol. 39(1), pages 51-67, January.
    5. Gunnelin, Ake & Soderberg, Bo, 2003. "Term Structures in the Office Rental Market in Stockholm," The Journal of Real Estate Finance and Economics, Springer, vol. 26(2-3), pages 241-265, March-May.
    6. Patric H. Hendershott & Colin M. Lizieri & George A. Matysiak, 1999. "The Workings of the London Office Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 365-387, June.
    7. Patric H. Hendershott & Bryan D. MacGregor & Raymond Y.C. Tse, 2002. "Estimation of the Rental Adjustment Process," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(2), pages 165-183.
    8. Arnott, Richard, 1989. "Housing Vacancies, Thin Markets, and Idiosyncratic Tastes," The Journal of Real Estate Finance and Economics, Springer, vol. 2(1), pages 5-30, February.
    9. Wheaton William C. & Torto Raymond G., 1994. "Office Rent Indices and Their Behavior over Time," Journal of Urban Economics, Elsevier, vol. 35(2), pages 121-139, March.
    10. Hendershott, Patric & MacGregor, Bryan & White, Michael, 2002. "Explaining Real Commercial Rents Using an Error Correction Model with Panel Data," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 59-87, Jan.-Marc.
    11. Webb, R. Brian & Fisher, Jeffrey D., 1996. "Development of an Effective Rent (Lease) Index for the Chicago CBD," Journal of Urban Economics, Elsevier, vol. 39(1), pages 1-19, January.
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    Cited by:

    1. Charles Ka Yui Leung & Patrick Wai Yin Cheung & Erica Jiajia Ding, 2008. "Intra-metropolitan Office Price and Trading Volume Dynamics: Evidence from Hong Kong," International Real Estate Review, Global Social Science Institute, vol. 11(2), pages 47-74.

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    JEL classification:

    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General

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