Disentangling the Short and Long-Run Effects of Occupied Stock in the Rental Adjustment Process
Purchase on Springer.com
$39.95 / €34.95 / £29.95*
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.
In the current stand of literature on the rental adjustment process starting with Hendershott et al. (Real Estate Economics, 30, 165-183, 2002a, Journal of Real Estate Finance and Economics, 24, 59-87, 2002b) it has become practice to treat the compound variable “occupied stock” as a supply variable. In this study we show that this variable deserves a more critical investigation and that the general view of a supply variable may be misleading. Using panel data covering 30 urban areas for 17 years, we investigate the rental adjustment process in the German office market. The application of recently developed cointegration techniques for non-stationary panel data in conjunction with the corresponding error correction model (ECM) enables us to overcome the data limitations, particularly existent for most European real estate markets. Hence, our primary motivation is (a) to demonstrate how “occupied stock” should be interpreted correctly and (b) to provide useful insights into the long-term relationships and short-run dynamics of real office prime rents. The empirical evidence suggests that a one percent rise in office employment increases real rents on average by 1.64% through higher demand for office space. On the other hand, a one percent increase in the supply of office space decreases real rents in the long run by 2.25%. The results from the error correction model show that deviations from the long-run equilibrium lead to an adjustment process which restores equilibrium within approximately 3 years.
- Arellano, M. (1987). Computing robust standard errors for within group estimators. Oxford Bulletin of Economics and Statistics, 49(4), 431–434. CrossRef
- Bhattacharjee, A., & Jensen-Butler, C. (2005). A model of regional housing markets in England and Wales. Working Paper, University of St. Andrews.
- Breitung, J., & Das, S. (2005). Panel unit root tests under cross sectional dependence. Statistica Neerlandica, 59(4), 414–433. CrossRef
- Blank, D. M., & Winnick, L. (1953). The structure of the housing market. Quarterly Journal of Economics, 67(2), 181–203. CrossRef
- Case, K. E., & Shiller, R. J. (1989). The efficiency of the market for single-family homes. American Economic Review, 79(1), 125–137.
- Case, K. E., & Shiller, R. J. (1990). Forecasting prices and excess returns in the housing market. AREUEA Journal, 18(3), 253–273.
- D’Arcy, E., Tsolacos, S., & McGough, T. (1997). An empirical investigation of retail rents in five European cities. Journal of Property Valuation and Investment, 15(4), 308–320. CrossRef
- Dobson, S. M., & Goddard, J. A. (1992). The determinants of commercial property prices and rents. Bulletin of Economic Research, 44(4), 301–321. CrossRef
- Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error-correction: representation, estimation and testing. Econometrica, 55(2), 251–276. CrossRef
- Englund, P., Gunnelin, A., Hendershot, P., & Söderberg, B. (2008). Adjustment in property space markets: taking long-term leases and transaction costs seriously. Real Estate Economics, 36(1), 81–109. CrossRef
- Gardiner, C., & Henneberry, J. (1988). The development of a simple regional model of office rent prediction. Journal of Property Valuation & Investment, 7(1), 36–52. CrossRef
- Gardiner, C., & Henneberry, J. (1991). Predicting regional office rents using habit-persistence theories. Journal of Property Valuation & Investment, 9(3), 215–126. CrossRef
- Giussani, B., & Tsolacos, S. (1993). The office market in the UK: Modeling the determinants of rental values. International Real Estate Research Session of the 1993, ASS/AREUEA Conference. Anaheim. CA, January.
- Giussani, B., Hsia, M., & Tsolacos, S. (1993). A comparative analysis of major determinants of office rental values in Europe. Journal of Property Valuation and Investment, 11(2), 157–173. CrossRef
- Geltner, D. M., & Miller, N. G. (2000). Commercial real estate analysis and investments. Upper Saddle River: Prentice Hall.
- Gonzales, J., & Pitarakis, J.-Y. (2006). Threshold effects in cointegrating relationships. Oxford Bulletin of Economics and Statistics, 68(1), 813–833. CrossRef
- Hanck, C. (2008). An intersection test for panel unit roots. Working Paper, University of Dortmund.
- Hekman, J. S. (1985). Rental price adjustment and investment in the office market. Journal of the American Real Estate and Urban Economic Association (AREUEA), 13(1), 32–47. CrossRef
- Hendershott, P. H. (1997). Uses of equilibrium models in real estate research. Journal of Property Research, 14(1), 1–13. CrossRef
- Hendershott, P. H., Lizieri, C. M., & Matysiak, G. A. (1999). The workings of the London office market. Real Estate Economics, 27(2), 165–183. CrossRef
- Hendershott, P. H., MacGregor, B. D., & Tse, R. Y. C. (2002). Estimation of the rental adjustment process. Real Estate Economics, 30(2), 165–183. CrossRef
- Hendershott, P. H., MacGregor, B. D., & White, M. (2002). Explaining commercial rents using an error correction model with panel data. Journal of Real Estate Finance and Economics, 24(1), 59–87. CrossRef
- Hort, K. (1998). The determinants of urban house price fluctuations in Sweden 1986–1994. Journal of Housing Economics, 7(2), 93–120. CrossRef
- Im, K., Pesaran, H. & Shin, Y. (1997). Testing for unit roots in heterogeneous panels, Discussion Paper, University of Cambridge, June.
- Ke, Q., & White, M. (2009). An econometric analysis of shanghai office rents. Journal of Property Investment & Finance, 27(2), 120–139. CrossRef
- Levin, A. & Lin, C.F. (1993). Unit Root Test in Panel Data: Asymptotic and Finite Sample Properties. University of California at San Diego, Discussion Paper No. 92-93.
- Matysiak, G., & Tsolacos, S. (2001). Identifying short-term leading indicators for real estate performance. Journal of Property Investment & Finance, 21(3), 212–32. CrossRef
- McGough, T., & Tsolacos, S. (1994). Forecasting office rental values using vector autoregressive models. The Proceedings of the Cutting Edge Property Research Conference, Royal Institution of Chartered Surveyors, London, September, 303-20.
- Moon, H. R., & Perron, B. (2004). Testing for a unit root in panels with dynamic factors. Journal of Econometrics, 122(1), 81–126. CrossRef
- Mourouzi-Sivitanidou, R. (2002). Office rent processes: the case of U.S. metropolitan markets. Real Estate Economics, 30(2), 317–44. CrossRef
- Pedroni, P. (1995). Panel cointegration; Asymptotic and finite sample properties of pooled time series tests, with an Application to the PPP Hypothesis. Indiana University Working Papers in Economics, No. 95-013, June.
- Pedroni, P. (1996). Fully modified OLS for heterogeneous cointegrated panels and the case of purchasing power parity. Indiana University Working Paper in Economics No. 96-020.
- Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61(s1), 653–670. CrossRef
- Phillips, P. C. B., & Moon, H. (1999). Linear regression limit theory for nonstationary panel data. Econometrica, 67(5), 1057–1111. CrossRef
- Phillips, P. C. B., & Sul, D. (2002). Dynamic panel estimation and homogeneity testing under cross section dependence. The Econometrics Journal, 6(1), 217–259. CrossRef
- Pollakowski, H., Wachter, S., & Lynford, L. (1992). Did office market size matter in the 1980s? A time-series cross-sectional analysis of metropolitan area office market. Journal of the American Real Estate and Urban Economic Association (AREUEA), 20(2), 303–24.
- Quah, D. (1994). Exploiting cross-section variation for unit root inference in dynamic data. Economics Letters, 44(1-2), 9–19. CrossRef
- Rosen, K. (1984). Toward a model of the office building sector. Journal of the American Real Estate and Urban Economic Association (AREUEA), 12(3), 261–69. CrossRef
- Scott, P., & Judge, G. (2000). Cycles and steps in British commercial property values. Applied Economics, 32(10), 1287–98. CrossRef
- Simes, R. J. (1986). An improved bonferroni procedure for multiple tests of significance. Biometrika, 73(3), 751–754. CrossRef
- Smith, L. B. (1974). A note on the price adjustment mechanism for rental housing. American Economic Review, 64(3), 478–481.
- Tsolacos, S., Keogh, G., & McGough, T. (1998). Modeling use, investment, and development in the Britain office market. Environment and Planning A, 30, 1409–27. CrossRef
- Wheaton, W. C. (1987). The cyclic behavior of the national office market. Journal of the American Real Estate and Urban Economic Association (AREUEA), 15(4), 281–99. CrossRef
- Wheaton, W. C., & Torto, R. G. (1988). Vacancy rates and the futures of office rents. Journal of the American Real Estate and Urban Economic Association (AREUEA), 16(4), 430–36. CrossRef
- Wilson, P. J., & Okunev, C. (1999a). Spectral analysis of real estate and financial assets markets. Journal of Property Investment and Finance, 17(1), 61–74. CrossRef
- Wilson, P. J., & Okunev, C. (1999b). Long-term dependencies and long-run non-periodic co-cycles: real estate and stock markets. Journal of Real Estate Research, 18(2), 257–78.
- Wilson, P. J., & Zurbruegg, R. (2003). Common trends and spectral response: a case study on the US. Journal of Property Research, 20(1), 1–22. CrossRef
- Wilson, P. J., Ellis, C., & Higgins, D. M. (2000). Comparing univariate forecasting techniques in property markets. Journal of Real Estate Portfolio Management, 6(3), 283–306.
- Disentangling the Short and Long-Run Effects of Occupied Stock in the Rental Adjustment Process
The Journal of Real Estate Finance and Economics
Volume 44, Issue 4 , pp 570-590
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
- Additional Links
- Panel cointegration analysis
- FMOLS regression
- Error Correction Model
- Urban rent models
- German office market
- Industry Sectors