Short and long-run rent adjustment in the Dublin office market

Abstract

Commercial property played a critical role in the downfall of Ireland’s tiger economy. Despite this, analytical research on Ireland’s non-residential markets remains surprisingly scarce. This paper makes a small contribution to redressing this deficit by estimating a rent determination model for the Dublin office market. A two-stage error correction mechanism is adopted. This involves estimation of a long-run equilibrium rent equation and a short-run rent adjustment process. The long-run analysis suggests that office demand is relatively elastic in Dublin. This may reflect the openness of the Irish economy and Dublin’s status as a secondary European market. The standard short-run model produces unrealistically low estimates of the natural vacancy rate. Tests for asymmetric adjustment prove inconclusive and fail to correct this. However, controlling for a structural shift in the Irish economy from manufacturing to office-based activities in the late 1990s results in a more plausible specification. This indicates that office rents are relatively sensitive to supply shocks, perhaps reflecting a high proportion of speculative development in Dublin. The short-run model also indicates a relatively slow rate of rent adjustment. This may derive from institutional characteristics of the Dublin market such as long leases.