Adjustment in Property Space Markets: Estimates from the Stockholm Office Market

37 Pages Posted: 17 Jul 2006 Last revised: 3 Jul 2010

See all articles by Peter Englund

Peter Englund

Swedish House of Finance

Ake Gunnelin

Royal Institute of Technology (KTH) - Department of Real Estate and Construction Management

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Bo Soederberg

University of Gävle - Department of Business Administration

Date Written: May 2005

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.

Suggested Citation

Englund, Peter and Gunnelin, Ake and Hendershott, Patric H. and Soederberg, Bo, Adjustment in Property Space Markets: Estimates from the Stockholm Office Market (May 2005). NBER Working Paper No. w11345. Available at SSRN: https://ssrn.com/abstract=727125

Peter Englund

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Ake Gunnelin

Royal Institute of Technology (KTH) - Department of Real Estate and Construction Management ( email )

SE-100 44 Stockholm
Sweden

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Bo Soederberg

University of Gävle - Department of Business Administration ( email )

801 76 Gavle
Sweden

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