Asymmetric Properties of Office Rent Adjustment

In this paper we use an error correction model for understanding the changes in real office rents for a panel of 15 U.S. MSA’s over the period 1990-2007. We find that office rents in all cities react positively to a rise in office employment and lagged rent changes, while lagged deviations from equilibrium rent levels exhibit a slow and partial adjustment over time. Given the non-negativity constraint of vacancy rates we extend the basic model by examining whether rents react to positive changes in employment conditional on the vacancy rate level. Our results show that office rents react significantly stronger to increases in employment when vacancy rates are below the long-term average. We also repeat the analysis for clusters of cities based on similarities in rent and employment dynamics using multi dimensional scaling. The cluster results confirm the overall conclusions and show that our results are not solely valid for the full panel of cities.