Adjustment in Property Space Markets: Taking Long-Term Leases and Transaction Costs Seriously |
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| Authors: | Peter Englund Åke Gunnelin Patric H Hendershott Bo Söderberg |
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| Institution: | Department of Finance, Stockholm School of Economics, SE 113 83 Stockholm Sweden and Finance Group, University of Amsterdam, 1018 WB Amsterdam, The Netherlands or .;Department of Real Estate and Construction Management, Royal Institute of Technology, 100 44 Stockholm Sweden or .;Centre for Property Research, University of Aberdeen Business School, Aberdeen AB24 2UF Scotland and San Diego State University, San Diego, CA 92182 or .;Department of Business Administration and Economics, University of Gävle, 801 76 Gävle Sweden or . |
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| Abstract: | Markets for property space adjust only gradually because tenants and landlords are constrained by long-term leases and transaction and information costs. Not only do rents adjust slowly, but space occupancy, which depends on historical rents, often differs from demand at current rent. This creates "hidden vacancies," vacancies that will develop in the future if market rent and the space demand driver are unchanged. That is, if current rent is greater/lesser than average rent, then hidden vacancies are positive/negative. Moreover, because of hidden vacancies, open vacancies and rent are not mirror images of each other. Thus it is necessary to estimate both rental and vacancy rate adjustment processes. We do this using annual data for Stockholm offices during the 1977–2002 period and simulate the response of rent and vacancies (open and hidden) to an employment shock. |
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