Estimating the Rental Adjustment Process

Patric H. Hendershott, Bryan D. MacGregor, Raymond Y.C. Tse

NBER Working Paper No. 7912
Issued in September 2000
NBER Program(s):Economic Fluctuations and Growth Program

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.

download in pdf format
   (171 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7912

Published: Hendershott, P. H., B. D. MacGregor and R. Y. C. Tse. "Estimation Of The Rental Adjustment Process," Real Estate Economics, 2002, v30(2,Summer), 165-183.

Users who downloaded this paper also downloaded* these:
Hendershott w4775 Rental Adjustment & Valuation of Real Estate in Overbuilt Markets: Fundamental vs. Reported Office Market Values in Sydney Australia
Englund, Gunnelin, Hendershott, and Soderberg w11345 Adjustment in Property Space Markets: Estimates from the Stockholm Office Market
Case, Goetzmann, and Rouwenhorst w7566 Global Real Estate Markets - Cycles and Fundamentals
Hendershott and Kane w4128 Office Market Values During the Past Decade: How Distorted Have Appraisals Been?
Hur Measuring the Effectiveness of Fiscal Policy in Korea
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us