Commercial Real Estate Rental Index: A Dynamic Panel Data Model Estimation

Using the actual quarterly rental income generated in the years between 2001 and 2010 by over 9,000 NCREIF commercial properties, we construct a commercial real estate rental index and estimate the time series properties (e.g., mean‐reversion speed and volatility) of market‐wide rental growth using a dynamic panel data model. The dynamic panel data model has several advantages over a standard hedonic regression. In addition, we incorporate age effects into our panel data model, and by doing so we correct the age bias in the repeated sales method and in the simple average method. Our estimates show that rental growth is cyclical but it generally lags behind broader economic growth. Surprisingly, the long‐term average rental growth is significantly lower than what is usually perceived, and the volatility of rental growth can be significantly under estimated when the conventional methods are adopted. We also find significant cross‐property type and cross‐region variations in the rental adjustment process. In contrast to the existing literature, we find a strong negative relation between rental growth and cap rate, and that this relation is significantly stronger than that between NOI growth and cap rate. Finally, we establish an empirical relation between price return and rental growth in the commercial real estate market.     

Advertising and Natural Vacancies in Rental Housing Markets

We formulate a model that explains vacancy durations arising from lags in matches between the suppliers and demanders of housing units. We emphasize rental housing markets in this exposition although the model could be extended to competitive or noncompetitive rental or home-ownership markets. In the case of rental markets, if tenants do not immediately inform landlords upon initiating search for a new unit, landlords are delayed in their search for a new tenant. These matching delays induce a positive natural vacancy rate that cannot be reduced to zero, even in competitive markets. Price-taking landlords are, however, able to affect the resulting vacancy duration through advertising in a Cournot-Nash equilibrium and will, in general, invest in inefficient levels of advertising. As a consequence, there may be a role for public policy to provide incentives that would induce noncooperative landlords to choose the vacancy cost-minimizing advertising solution.     

Personal Residential Real Estate Investment in Australia: Investor Characteristics and Investment Parameters

To date our understanding of the factors affecting the housing supply stem from the private provision of new units through real estate development. This article investigates a different aspect of housing supply, the private provision of rental housing through investment in existing properties. Using logistic regression and a series of micro data sets of Australian households, we examine the investment decision of residential rental property investors over the period 1990–2004. The sample period incorporates a full real estate cycle. Our results indicate that wealth-related factors are the dominant factors driving these investments. Life-cycle factors such as marriage and children play a less important role. Most of the determinants of income property investment do not vary with the property cycle. Marriage is an exception. It became more important as house prices rose.     

Multifamily Housing Demand: 1980–2000

Using Annual Housing Survey data on multifamily structure occupancy by household type for 1975, together with number of household projections from the Department of Agriculture, a gross level of multifamily housing demand is projected. Allowance is made for a 2 percent replacement rate of the total stock as well as a 5 percent vacancy figure for new household demand. Assuming that: (1) there is no massive shift away from one-family ownership to multifamily units, and (2) the present level of conversions from one-family units to multiple occupancy continues to offset the trend of conversion from rental multifamily units to condominium status, then total future demand for multifamily rental units is well within current construction levels.

• We are presently building one and one-half times the demand of 416,000 units per year projected for 1975–80.

• The demand from 1980 to 1990 decreases to 367,000 new units annually.

• This is further reduced to 335,000 units annually for the period 1990–2000.

The major determinants of future demand will focus on the scrap-page rate of extant facilities and the regional shifts of population.
The future supply of multifamily structures depends on an abatement of construction costs and interest rates, and/or massive levels of Government subsidy.
There is evidence that operating cost rises are challenging the financial integrity of multifamily structures. This is manifested by the HUD and private market mortgage delinquency and foreclosure rates.
Policy focus for the future should emphasize the minimization of both construction and operating costs rather than augmented delivery rates.     

A Regime‐Switching Approach to Modeling Rental Prices of U.K. Real Estate Sectors

This article uses regime‐switching models of the threshold type to analyze the adjustment process of rental prices for three U.K. commercial real estate sectors over the period 1974–2008. The nonlinear models outperform their linear counterparts in in‐sample fit. Their out‐of‐sample forecasting ability is better whenever the corresponding linear models contain a significant amount of neglected nonlinearity. Regime switches are triggered when the growth rates of rental price exceed certain threshold levels. For the industrial and retail sectors such regime switches occur in situations of strong excess demand, for the office sector they occur when there is strong excess supply.     

Rent Controls in Ontario: Roofs or Ceilings?

This paper describes the rent control program in Ontario and discusses the consequences of these controls. It indicates that rent controls caused both a small nominal decline and a large real decline in the per unit value of rental apartments, substantially reduced new rental housing starts, generated a rental housing shortage, created a dual market with significant rent differences between the controlled and uncontrolled (new construction) sectors, and imposed large costs on government in the form of foregone tax revenues and increased rental housing subsidies. The paper also indicates some of the political responses to the developing economic effects, such as the imposition of additional land use controls and increased government spending programs to stimulate new rental construction.     

Organizational form as a solution to the problem of credible commitment: The evolution of naming strategies among U.S. hotel chains, 1896–1980

This paper describes how organizational form can solve the problem of commitment that complicates exchange. I illustrate this by analyzing the commitment problem of hotel chains. Consideration of the commitment problem indicates that hotel chains are better off naming their units the same, so as to create the potential for future business from customers. However, some hoteliers believed units should be named differently so they are not identified with the chain. These two strategies illustrate a powerful tension between strategies that allow the organization to be more consistent, and strategies that facilitate adaptation to local conditions. I analyze the failure rates of hotel chains to show that selection favored chains that employed the naming strategy that generates commitment.     

Office Rent Processes: The Case of U.S. Metropolitan Markets

This paper synthesizes elements of the traditional and contemporary theory of real estate markets to formulate an empirical framework for exploring metropolitan office rent processes. Such a framework is then applied to the analysis of office rents across 18 U.S. office markets during 1986–1995. The empirical results underscore the sluggishness of rental adjustments, highlight the extent of rental disequilibria across markets, and uncover the role of office employment factors (such as size, diversity, spatial organization, growth rates, and volatility), construction costs, interest rates, amenities, and zoning in shaping interarea differentials in the equilibrium component of office rents.     

Investor Rationality: Evidence from U.K. Property Capitalization Rates

Recent analyses have suggested the irrationality of Australian and U.S. office property investors in that they have failed to raise capitalization rates sufficiently at rental cyclical peaks to account for the obvious mean reversion in real rents and thus have significantly overvalued properties. In this article, we present a model of capitalization rates and explain U.K. office and retail cap rates in an error correction framework. We demonstrate that our proxies for expected real rental growth do, in fact, forecast future real growth and that cap rates reflect rational expectations of mean reversion in future real cash flows. Moreover, property cap rates are linked to the equity capitalization rate (dividend/price ratio) and expected real dividend growth in the expected manner.     

A Price Dispersion Equilibrium in a Spatially Differentiated Housing Market with Search Costs

An equilibrium model of search in a spatially differentiated rental housing market is formulated that predicts both rent dispersion and equilibrium vacancies. The equilibrium rent distribution is determined on the landlord's (rental supply) side given tenants' search strategies. Then tenants' optimal search strategy, denned by the share of the market a tenant searches, is determined given the costs and benefits of search and the distribution of landlords' rents. The equations of supply and demand for rental units are then combined to derive a costly information, free-entry Nash equilibrium in the market rents. Finally, the sensitivity of equilibrium vacancies and rents to changes in search costs and other exogenous parameters is explored.     

The Attraction of Home Ownership

George Sternlieb argues convincingly that rental housing is likely to remain in somewhat short supply in the immediate future with some loosening at a later date. All of this is premised on no significant change in current construction and market trends. On the other hand, a change in national housing policy and sharing equity advantages with tenants could produce significant increases in rental units.     

Toward a Model of the Office Building Sector

High rise office buildings represent large capital outlays in very competitive markets. Investment and development decisions require careful market analysis to assure sufficient demand to lease the office space at rental rates which will make the venture financially attractive. Present methodology for analyzing future commercial real estate market conditions can at best be said to be inadequate. This methodology relies on concepts such as "market absorption" rates and "normal" vacancy rates. These concepts usually rely on accounting type and trend line techniques to provide forecasts of space demand. In this paper we provide an alternative methodology for forecasting the key variables in the office space market by developing a statistical model of supply and demand. The key variables that need to be forecasted are the stock of office space (in square feet), the flow of new office construction (in square feet), the vacancy rate (in percent), and the rent for office space (net rent per square foot).     

Solutions for flexible container leasing contracts with options under capacity and order constraints

The container–shipping market becomes prosperous with the development of the global economy. As shipping networks become more complex and heterogeneous, container capacity planning becomes more difficult. This paper tackles the container planning problem from the carrier’s perspective in a two-echelon container shipping service chain (CSSC), which includes one carrier and one upstream rental company. A flexible contract with options is introduced into the one-period container planning mechanism. With the flexible options contract, the rental company requires the carrier to make a commitment or place an order in advance. Options give buyer the right to modify the initial orders to better match the supply with the demand. Based on the carrier’s decision tendency, i.e., aggressive or conservative, we analyze the application strategies of the unilateral options and the bidirectional options in different practical scenarios. In particular, for the applicability of the decision models, we further consider the shipping capacity and the minimum order constraints and formulate the carrier’s option policies with constrained nonlinear programs. Numerical examples show that the proposed decision strategies with option contract cannot only effectively increase the container trading quantity between the rental company and the carrier, but also significantly reduce the carrier’s container capacity risk while increasing its profit.     

Maintenance, Housing Quality, and Vacancies under Imperfect Information

A model of a rental housing market is presented in which landlords economize on the maintenance of housing quality to profit from tenants imperfect information. In a partial equilibrium model that describes tenants by their distribution of minimum acceptable (reservation) quality for units priced at an identical rent, these profits induce entry of new units, resulting in rental vacancies. The equilibrium number of landlords and the market vacancy rate are derived in a free entry, imperfect information equilibrium in which the distribution of rental unit qualities range from the competitive quality to that which would be offered by a monopoly landlord.     

The Value of Going Green in the Hotel Industry: Evidence from Beijing

Based on several unique datasets in Beijing, this article investigates the value of going green in the hotel industry by combining the traditional hedonic pricing model with the state‐of‐the‐art content analysis of online reviews. The results indicate that the rate of complaints about the indoor environmental quality of green hotels is roughly 19% lower than that for nongreen hotels. Hedonic regression analysis concludes that green hotels enjoy a significant room rate premium of 6.5% without reducing occupancy rates, mainly due to improved indoor environmental quality. Recognizing the presence of such cobenefits is likely to induce hoteliers to embrace green practices.     

Owner Tenancy as Credible Commitment under Uncertainty

How do landlords provide credible signals to tenants that they will maintainthe building when the needed upkeep over the contract period is uncertain at the time that rental decisions are made? In this paper, we develop a model of credible commitment under uncertainty wherein owner tenancy serves as the commitment signal to the market. In comparing completely tenant-occupied (absentee landlord) to partially owner-occupied buildings, the model predicts that in the latter case, the equilibrium rent is higher. We test this prediction using rental data for a sample of office buildings, some of which are completely tenant-occupied while others are partially owner-occupied. The results indicate that, as predicted by the model, rents are significantly higher when landlords can signal a commitment to high-performance standards.     

Profitability of Office Rental Market in Seoul: An Application of Simultaneous Structural Equations

This article is concerned with the estimation of excess rates of return on the office rental market in Seoul using a simultaneous structural equation model. The office rental market in Seoul is spatially divided into CBD and non-CBD, and the model has three behavior equations of Chonsei price, monthly rent and key deposit, with two identity equations of conversion rate and excess rate of return. This article reveals that it would be rational for the owners to ask tenants for a higher deposit with a lower monthly rent under increasing interest rates because the interest rate has a positive effect on the Chonsei deposit and the key deposit, but a negative effect on the monthly rent. Although high nominal interest rate and low economic growth reduce the excess rate of return on both submarkets, the non-CBD office rental market would be more profitable than the CBD market despite lower levels of the monthly rent and key deposit.     

THE EFFECTS OF CAPACITY ON SALES UNDER ALTERNATIVE VERTICAL CONTRACTS*

Retailer capacity decisions can impact sales for products by affecting, for example, availability and visibility. Using data from the U.S. video rental industry, we report estimates of the effect of capacity on sales under alternative vertical contracts. New monitoring technologies facilitated new supply contracts in this industry, reducing upfront costs of capacity but requiring minimum capacity purchases, strongly impacting stocking decisions. We find that larger capacity (more tapes) for a given title can substantially increase rentals of that title; and that alternative vertical contractual forms for distributing tapes from studios to retailers strongly impacts the relationship between capacity and rentals.     

Permits, Starts, and Completions: Structural Relationships Versus Real Options

Real estate development from raw land to completed structures is a multistage process. Given the current view of development as the exercise of a real option, the question arises whether development should be modeled as a compound option. This paper tests the validity of the compound option characterization by determining whether builders start units for which they have permits and then complete units started consistent with the predictions of the real options model. To do so, I first identify a reduced form relationship between permits and starts and then between starts and completions. The parameters of this relationship indicate how well permits proxy for starts and starts for completions. Then, I determine whether controlling for this structural relationship, new information, and uncertainty in returns affect permit exercise and completion rates, as in the exercise of real options. I find that current and previous quarter permits forecast current single-family starts, while multifamily starts require more quarterly lags of permits. More than one and two year's worth of lagged starts numbers are needed to estimate current quarter completions for single- and multifamilys buildings, respectively. The principal result is that once building permits have been obtained, the development process proceeds to completion. While there is no evidence that completion is the exercise of an option embedded in a start, some aspects of permits are consistent with builders treating them as an option for starts. However, even if they do, given permits obtained, it takes large changes in market conditions to affect small changes in starts.     

Rental Housing Markets and the Natural Vacancy Rate

This paper employs new census vacancy rate data to analyze the price-adjustment mechanism for rental housing. The study extends previous research on this topic, which provided conflicting evidence concerning the traditional theory of rental housing market adjustment (see Smith [10] , [11] ; DeLeeuw and Ekanem [2] ; Eubank and Sirmans [4] ; and Rosen and Smith [8] ). Cross-section and time-series data are pooled to estimate natural vacancy rates for sixteen United States cities for the 1981–85 period. The analysis further explores the determinants of variation in natural vacancy rates across those metropolitan areas.