Estimating the Rental Adjustment Process

19 Pages Posted: 29 Sep 2000 Last revised: 14 Feb 2021

See all articles by Patric H. Hendershott

Patric H. Hendershott

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

Bryan MacGregor

University of Aberdeen - Centre for Property Research

Raymond Y. C. Tse

University of Amsterdam - Centre for Environmental Law; Universita degli Studi di Pavia

Date Written: September 2000

Abstract

Rental adjustment equations have been estimated for a quarter century. In the U.S., models have used the deviation of the actual vacancy rate from the natural rate as the main explanatory variable, while in the UK, 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 re-estimate these equations using alternative formulations but can do little to improve them overall. However, we identify econometric concerns with the specifications. We then derive a model incorporating both supply and demand factors within an Error Correction framework, and show how the U.S. and UK traditions are special cases of this more general formulation. We next estimate this equation using data from the City of London office market. Our initial specification of this more generalized model is greatly superior to the vacancy rate model. Finally, we estimate a two-equation variant with a separate vacancy rate equation; this model also performs much better than that of HLM. Importantly, our model passes standard modern econometric requirements for unit roots and co-integration. We find little evidence of special or temporal variation in natural vacancy rates.

Suggested Citation

Hendershott, Patric H. and MacGregor, Bryan D. and Tse, Raymond Y. C., Estimating the Rental Adjustment Process (September 2000). NBER Working Paper No. w7912, Available at SSRN: https://ssrn.com/abstract=243656

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

Bryan D. MacGregor

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland
44-1224-272-356 (Phone)
44-1224-273-487 (Fax)

Raymond Y. C. Tse

University of Amsterdam - Centre for Environmental Law

Amsterdam, 1018 WB
Netherlands

Universita degli Studi di Pavia

via S. Felice 5
Facolta di Economia
I-27100 Pavia
Italy

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