Implicit Forward Rents as Predictors of Future Rents
FAME Research Paper No. 59
43 Pages Posted: 15 May 2003
Date Written: October 2002
This paper investigates the relation between the term structure of rents and future spot rents. A rich database of office rental agreements for various maturities is used to estimate the term structure of rents, and from this structure implicit forward rents are extracted. The data pertain to commercial properties in the three largest Swedish cities for the period 1998-2002. A positive relation between forward and spot rents is found in some regions, but forward rents underestimate future rent levels. Another contribution of the paper lies in the area of rental index construction. We provide evidence that rental indices should not only be quality-constant (i.e. indices should not only control for the characteristics of rental units), but should also be maturity-constant.
Keywords: Term Structure, Expectations Hypothesis, Forward Rents, Rental Index Construction
JEL Classification: R33, C21, C22
Suggested Citation: Suggested Citation