Explaining Real Commercial Rents Using an Error Correction Model with Panel Data

This paper presents rent models for retail and office property in the United Kingdom. Panel data are used covering eleven regions for 29 years, enabling us to overcome the limitations of a relatively short time series. We use an error correction model (ECM) framework to estimate long-run equilibrium relationships and short-term dynamic corrections. The combination of panel data and an ECM is an innovative approach that is still being developed in economics. We construct new supply series that combine infrequent stock data with more frequent construction data. Separate regional models are estimated for retail and office properties. The regions are then combined into a number of panels on the basis of the income and price elasticities in the long-run and short-run models. Unlike previous studies, we find no evidence of a board north-south divide between low growth and high growth regions. Like these studies we do find a London effect: in London, demand elasticities for space with respect to both price (rent) and income are much lower in magnitude. We conclude that, while the economic drivers may vary, there is no evidence of differences in the operation of the regional property markets outside London. Elasticities for retail and office are similar. Our final models are parsimonious with single measures of economic activity and of supply and always support the use of an ECM.