Rationality of investors in the office market in Warsaw

Abstract

Our research is based on econometric models, nonetheless, it serves to verify the rationality of participants (investors) in the office market in Warsaw. Investor, when deciding to start a construction of a new office building, should take into account not only the potential yield, but also the potential risk associated with market conditions reflected by vacancies. In the office market equilibrium vacancy rate is equal to the natural vacancy rate. The natural vacancy rate was determined by various authors based on various models. Nowadays, it is agreed that the natural vacancy rate is local in nature and can fluctuate over time. In the study we use quarterly time series of the Warsaw office market (stock, supply, vacancy rate, rents, yields) along with demand data and financial data (interest rates) starting at Q1 2001 and Q1 2007, ending Q2 2021. To make the analysis and inference more robust to missing data, in this paper, we determine the natural vacancy rate based on five approaches often cited in the literature (Voith and Crone, 1988; Wheaton and Torto, 1988; Hendershott, 1996; Hendershott et al., 2002; Englund et al., 2008; McCartney, 2010; Ke and White, 2013). After determining the natural vacancy rate, we formulate a model in which the supply of office space is explained by the difference between office yield rate and risk free interest rate, as well as, the difference between market vacancy rate and natural vacancy rate. Using autoregressive approach (VAR, VECM, Treshold autoregression) we verify the relationships including shocks, leads, lags and asymmetry. The conclusions of the analysis should allow us to answer the question whether investors in the Warsaw office market do make rational investments or are systematically wrong, causing overbuilding.