The natural vacancy rate of the Singapore office market

Abstract

The concept of a natural vacancy rate is relatively well established in the real estate literature. The natural vacancy rate is an equilibrium level of inventory of space, in the sense that both the matching process between landlord and tenant is facilitated, and that building owners hold an optimal buffer stock of inventory to meet future leasing contingencies. It is the current deviation from the natural vacancy rate (and not the absolute level of the current vacancy rate) which determines the degree to which the given market is in or out of equilibrium. When vacancy rates are above the natural vacancy rate, rents will fall and vacancies will drift upward toward equilibrium. The determination of the natural vacancy rate is therefore significant in that it can facilitate the monitoring of the market conditions since a vacancy rate below the natural vacancy rate signifies tight market. The converse is true if the vacancy rate is above the equilibrium level. The natural vacancy rate for the office space market in Singapore over the sample period 1979-1997 is found to be between 10% and 12% depending on the model used. These models have been selected based on their R 2 , D-W and other relevant statistics.