Rational Expectations? A Time-Series Analysis of Building Booms in the London Office Market
19 Pages Posted: 17 Nov 2010 Last revised: 30 Jun 2011
Date Written: November 16, 2010
Abstract
Expectations of future market conditions are generally acknowledged to be crucial for the development decision and hence for shaping the built environment but there appears to be no consensus in the literature on what exactly constitutes rational behaviour of individual developers. This paper outlines the rationality conundrum that developers face when trying to anticipate their competitors’ knowledge and behaviour. Keeping in mind these limitations, we then test empirically for evidence of rational versus adaptive and naive expectations in the Central London office market from 1987 to 2009. Applying VAR models and a recursive OLS regression with one-step forecasts, we do not find evidence of adaptive and naïve expectations of developers. Although the magnitude of the errors and the length of time lags between market signal and construction starts vary over time and development cycles, our results confirm that developer decisions are explained to a large extent by contemporaneous and historic conditions in both the City and the West End but this is more likely to stem from the lengthy design, financing and planning permission processes rather than adaptive or naive expectations.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Real Options, Irreversible Investment and Firm Uncertainty: New Evidence from U.S. Firms
-
Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development
By Laarni T. Bulan, Christopher J. Mayer, ...
-
Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development
By Laarni T. Bulan, Christopher J. Mayer, ...
-
Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development
By Laarni T. Bulan, Christopher J. Mayer, ...
-
By A. Steven Holland, Steven H. Ott, ...
-
Pricing Upward-Only Adjusting Leases
By Brent W. Ambrose, Patric H. Hendershott, ...
-
By Evrim Akdoğu and Peter Mackay
-
An Empirical Test of a Contingent Claims Lease Valuation Model
By Richard Stanton and Nancy Wallace