Working Paper: NBER ID: w11345
Authors: Peter Englund; Ake Gunnelin; Patric H. Hendershott; Bo Soderberg
Abstract: Markets for property space adjust only gradually because tenants are constrained by long-term leases and landlords and tenants face transactions and information costs. Not only do rents adjust slowly, but space occupancy may differ from demand at current rent, giving rise to "hidden vacancies". We estimate the joint dynamics of office rents and vacancies using an error-correction model using a new lease rent series for Stockholm offices 1977--2002 estimated on 2,500 leases. It takes 5-10 years for the market to adjust to a shock. In a model simulation of a positive employment shock open vacancies fall from the natural level of 7 percent to below 4 percent, while hidden vacancies increase by about as much. Most of the variation in hidden vacancies over time is explained by the difference between demand at current and average rent on existing leases, which we calculate using data on contract lease length.
Keywords: office market; rents; vacancies; error-correction model; hidden vacancies
JEL Codes: R0; R1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| employment shocks (J63) | vacancy rates (R33) |
| employment shocks (J63) | rents (R21) |
| rents (R21) | vacancy rates (R33) |
| vacancy rates (R33) | rents (R21) |
| disequilibrium gap in rents (D59) | adjustment of vacancies (J68) |
| hidden vacancies (J60) | adjustment of rents (R21) |
| adjustment of rents (R21) | hidden vacancies (J60) |
| market adjustments (M52) | rents and vacancies (R21) |
| long-term leases (R33) | tenant responsiveness (R21) |