Estimation of the Rental Adjustment Process

Patric Henry Hendershott, Bryan Duncan MacGregor, R. Tse

    Research output: Contribution to journalArticle

    59 Citations (Scopus)

    Abstract

    Rental adjustment equations have been estimated for a quarter century. In the United States, models have used the deviation of the actual vacancy rate from the natural rate as the main explanatory variable, while in the United Kingdom, drivers of the demand for space have dominated the estimation, The recent papers of Hendershott (1996) and Hendershott, Lizieri and Matysiak (HLM 1999) fall into the former category. We reestimate these equations using alternative formulations and present evidence that changes in real interest rates were not capitalized into Sydney and London real land prices. We then derive a model incorporating supply and demand factors within an Error Correction framework and show how the U.S, and U.K, traditions are special cases of this more general formulation. We next estimate a two-equation variant with a separate vacancy rate equation using data from the City of London office market. This model allows calculation of the underlying price (rent) and income (employment) elasticities and explains the data marginally better than the HLM model. Importantly, our model passes standard modern econometric requirements for unit roots and cointegration.

    Original languageEnglish
    Pages (from-to)165-184
    Number of pages19
    JournalReal Estate Economics
    Volume30
    Issue number2
    DOIs
    Publication statusPublished - 2002

    Keywords

    • LONDON OFFICE MARKET
    • NATURAL VACANCY RATE
    • BEHAVIOR

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