Skip to main content
SpringerLink
Log in

Explaining Real Commercial Rents Using an Error Correction Model with Panel Data

  • Published:
The Journal of Real Estate Finance and Economics Aims and scope Submit manuscript

Abstract

This paper presents rent models for retail and office property in the United Kingdom. Panel data are used covering eleven regions for 29 years, enabling us to overcome the limitations of a relatively short time series. We use an error correction model (ECM) framework to estimate long-run equilibrium relationships and short-term dynamic corrections. The combination of panel data and an ECM is an innovative approach that is still being developed in economics. We construct new supply series that combine infrequent stock data with more frequent construction data. Separate regional models are estimated for retail and office properties. The regions are then combined into a number of panels on the basis of the income and price elasticities in the long-run and short-run models. Unlike previous studies, we find no evidence of a board north–south divide between low growth and high growth regions. Like these studies we do find a London effect: in London, demand elasticities for space with respect to both price (rent) and income are much lower in magnitude. We conclude that, while the economic drivers may vary, there is no evidence of differences in the operation of the regional property markets outside London. Elasticities for retail and office are similar. Our final models are parsimonious with single measures of economic activity and of supply and always support the use of an ECM.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Ball, M., C. Lizieri, and B. D. MacGregor. (1998). The Economics of Commercial Property Markets. London: Routledge.

    Google Scholar 

  • Banerjee, A., J. Dolado, J. W. Galbraith, and D. F. Hendry. (1993). Co-integration, Error-Correction, and the Econometric Analysis of Non-Stationary Data. Oxford: Oxford University Press.

    Google Scholar 

  • Blank, D. M., and L. Winnick. (1953). “The Structure of the Housing Market,” Quarterly Journal of Economics 67, 181-203.

    Google Scholar 

  • Charemza, W., and D. F. Deadman. (1997). New Directions in Econometric Practice. Cheltenham: Edward Elgar.

    Google Scholar 

  • D'Arcy, E., T. McGough, and S. Tsolacos. (1997). “National Economic Trends, Market Size and City Growth Effects on European Office Rents,” Journal of Property Research 14(4), 297-308.

    Google Scholar 

  • Dobson, S., and J. Goddard. (1992). “The Determinants of Commercial Property Prices and Rents,” Bulletin of Economic Research 44, 301-321.

    Google Scholar 

  • Dougherty, C. D. (1992) Introduction to Econometrics. New York: Oxford University Press.

    Google Scholar 

  • Engle, R. F., and C. W. J. Granger. (1987). “Cointegration and Error Correction: Representation, Estimation and Testing,” Econometrica 55, 251-276.

    Google Scholar 

  • Fuller, W. A. (1976) Introduction to Statistical Time Series. New York: John Wiley.

    Google Scholar 

  • Gabriel, S. A., and F. E. Nothaft. (1998). “Rental Housing Markets and the Natural Vacancy Rate,” Journal of the American Real Estate and Urban Economics Association, 16, 419-436.

    Google Scholar 

  • Gardiner, C., and J. Henneberry. (1988). “The Development of a Simple Regional Office Rent Prediction Model,” Journal of Valuation 7(1), 36-52.

    Google Scholar 

  • Gardiner, C., and J. Henneberry. (1991). “Predicting Regional Office Rents Using Habit-persistence Theories,” Journal of Property Valuation and Investment 9(3), 215-226.

    Google Scholar 

  • Guissani, B., M. Hsia, and S. Tsolacos. (1993). “A Comparative Analysis of the Major Determinants of Office Rental Values in Europe,” Journal of Property Valuation and Investment 11(2), 157-173.

    Google Scholar 

  • Hamelink, F., M. Hoesli, C. Lizieri, and B. D. MacGregor. (2000). “Homogeneous Commercial Property Market Groupings and Portfolio Construction in the United Kingdom,” Environment and Planning A 32, 323-344.

    Google Scholar 

  • Harris, R. I. D. (1995). Using Cointegration Analysis in Econometric Modelling. London: Prentice Hall.

    Google Scholar 

  • Hendershott, P. H. (1995). “Real Effective Rent Determination: Evidence from the Sydney Office Market,” Journal of Property Research 12(2), 127-135.

    Google Scholar 

  • Hendershott, P. H. (1996). “Rental Adjustment and Valuation in Overbuilt Markets: Evidence from the Sydney Office Market,” Journal of Urban Economics 39, 51-67.

    Google Scholar 

  • Hendershott, P. H., C. Lizieri, and G. A. Matysiak. (1999). “The Workings of the London Office Market,” Real Estate Economies 27(2), 365-387.

    Google Scholar 

  • Hendry, D. F., and G. E. Mizon. (1978). “Serial Correlation as a Convenient Simplification, Not a Nuisance: A Comment on a Study of The Demand for Money by the Bank of England,” Economic Journal 88, 549-563.

    Google Scholar 

  • Hetherington, J. (1988). “Forecasting of Rents.” In A. MacLeary, and N. Nanthakumaran (eds.) Property Investment Theory (pp. 97-107). London: E. & F. N. Spon.

    Google Scholar 

  • Hoesli, M. C. Lizieri, and B. D. MacGregor. (1997). “The Spatial Dimensions of the Investment Performance of UK Commercial Property,” Urban Studies 34(9), 1475-94.

    Google Scholar 

  • Hoesli, M., and B. D. MacGregor. (2000). Property investment: The Principles and Practice of Portfolio Management. Harlow: Pearson Education.

    Google Scholar 

  • Hort, K. (1998). “The Determinants of Urban House Price Fluctuations in Sweden,” Journal of Housing Economics 7(2), 93-120.

    Google Scholar 

  • Key, T., B. D. MacGregor, N. Nanthakumaran, and F. Zarkesh. (1994). Economic Cycles and Property Cycles, Main Report for Understanding the Property Cycle. London: RICS.

    Google Scholar 

  • Levin, A. C., and Lin. (1993). Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties, mimeo.

  • McGough, T., and S. Tsolacos. (1995). “Forecasting Commercial Rental Values in the UK Using ARIMA Models,” Journal of Property Valuation and Investment 13(5), 5-21.

    Google Scholar 

  • Pedroni, P. (1999). “Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors,” Oxford Bulletin of Economics and Statistics 16(s1), 653-670.

    Google Scholar 

  • Pedroni, P. (1997). Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis: New Results, Working Paper, Indiana University.

  • Perron, P. (1988). “Trends and Random Walks in Macroeconomic Time Series: Further Evidence from a New Approach,” Journal of Economic Dynamics and Control 12, 1361-1401

    Google Scholar 

  • Phillips, P. C. B. (1987). “Time Series Regression with a Unit Root,” Econometrica 55, 277-301.

    Google Scholar 

  • Phillips, P. C. B., and P. Perron. (1988). “Testing for a Unit Root in Time Series Regressions,” Biometrika 75, 335-346.

    Google Scholar 

  • Pollakowski, H. O., S. M. Wachter, and L. Lynford. (1992). “Did Office Size Matter in the 1980s? A Time Series Cross-Sectional Analysis of Metropolitan Area Office Markets,” Journal of the American Real Estate and Urban Economics Association 20(2), 303-324.

    Google Scholar 

  • RICS. (1999). The UK Property Cycle—a History from 1921 to 1997. London: Royal Institution of Chartered Surveyors.

    Google Scholar 

  • Rosen, K. T. (1984). “Towards a Model of the Office Building Sector,” Journal of the American Real Estate and Urban Economics Association 12(3), 261-269.

    Google Scholar 

  • Rosen, K. T., and L. B. Smith. (1984). “The Price Adjustment Process for Rental Housing and the Natural Vacancy Rate,” American Economic Review 73, 779-786.

    Google Scholar 

  • Shilling, J. D., C. F. Sirmans, and J. B. Corgel. (1987). “Price Adjustment Process for Rental Office Space,” Journal of Urban Economics 22, 90-100.

    Google Scholar 

  • Shilling, J. D., C. F. Sirmans, and J. B. Corgel. (1992). “Natural Office Vacancy Rates: Some Additional Estimates,” Journal of Urban Economics 31, 140-143.

    Google Scholar 

  • Silver, M., and M. Goode. (1990). “Econometric Forecasting Model for Rents in the British Retail Property Market,” International Journal of Management Science 18(5) 529-539.

    Google Scholar 

  • Smith, L. B. (1969). “A Model of the Canadian Housing and Mortgage Markets,” The Journal of Political Economy 77, 795-816.

    Google Scholar 

  • Smith, L. B. (1974). “A Note on the Price Adjustment Mechanism for Rental Housing,” American Economic Review 64, 478-481.

    Google Scholar 

  • Thompson, B., and S. Tsolacos. (1999). “Rental Adjustment and Forecasts in the Industrial Market,” Journal of Real Estate Research 17(1/2), 151-168.

    Google Scholar 

  • Tsolacos, S., G. Keogh, and T. McGough (1998). “Modelling Use, Investment and Development in the British Office Market,” Environment and Planning A 30, 1409-1427.

    Google Scholar 

  • Tse, R. Y. C., and B. D. MacGregor (1999). “Housing Vacancy and Rental Adjustment: Evidence from Hong Kong,” Urban Studies 36, 1769-1782.

    Google Scholar 

  • Wheaton, W. C. (1987). “The Cyclic Behavior of the National Office Market,” Journal of the American Real Estate and Urban Economics Association 15(4), 281-299.

    Google Scholar 

  • Wheaton, W. C., and R. G. Torto (1988). “Vacancy Rates and the Future of Office Rents,” Journal of the American Real Estate and Urban Economics Association 16(4), 430-436.

    Google Scholar 

  • Wheaton, W. C., R. G. Torto, and P. Evans (1997). “The Cyclic Behavior of the Greater London Office Market,” The Journal of Real Estate Finance and Economics 15(1), 77-92.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Land Economy, University of Aberdeen, Kings College, Aberdeen

    Patric Hendershott, Bryan Macgregor & Michael White

Authors
  1. Patric Hendershott
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Bryan Macgregor
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Michael White
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Hendershott, P., Macgregor, B. & White, M. Explaining Real Commercial Rents Using an Error Correction Model with Panel Data. The Journal of Real Estate Finance and Economics 24, 59–87 (2002). https://doi.org/10.1023/A:1013930304732

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1013930304732

Search

Navigation