Natural Vacancy Rate Research Articles

Information Asymmetry and the Rent and Vacancy Rate Dynamics in the Office Market

This study investigates how information asymmetry affects the rent and vacancy rate adjust in response to external shocks using empirical data from the Hong Kong office market. We show that information asymmetry about the quality of real estate asset will lead to slower rent adjustments in response to external shocks. Information asymmetry makes it more difficult for the landlord and prospective tenant to agree on a new equilibrium rent, which also leads to temporary deviation of the vacancy rate form the natural vacancy rate. Compared to a low-end office unit, information asymmetry is less serious for a high-end office unit since a larger proportion of its rental value is derived from its location attributes which are easily observable by both the landlord and prospective tenant. One empirical implication is that high-end office rents adjust faster when there is a short-term disequilibrium. The other side of the coin is that the vacancy rates of high-end offices are less responsive to external shocks assuming that the natural vacancy rates are relatively stable over time. Empirical data from the Hong Kong office sub-markets are consistent with these implications.

Efficiency rents: A new theory of the natural vacancy rate for rental housing

This paper adapts the theory of efficiency wages to explain the natural vacancy rate in rental housing markets. A positive vacancy rate provides landlords an incentive to invest in maintenance because if they fail to do so, some tenants will leave and the unit will sit vacant for a finite period of time. The resulting foregone rent will penalize landlords’ failure to maintain. Habitability laws, which have been enacted by states since the 1960s, provide a non-market penalty which lessens the need for market enforcement. Variation in these laws by state offers an opportunity to test the theory.

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

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.

The Rent Adjustment Process and the Natural Vacancy Rate of Office Building in Seoul: Difference in Office Size

The Rent Adjustment Process and the Natural Vacancy Rate of Office Building in Seoul: Difference in Office Size

International Real Estate Review

We apply the stock flow model for the German residential rental market using a data set that includes the overwhelming majority of nomenclature of territorial units for statistics (NUTS) 3 regions for the 2004-2007 period. Aside from proving conditional rental price convergence, we have detected a turnaround in vacancy stocks between the short and the long term. While East German counties and West German independent cities currently exhibit the highest and lowest vacancy rates, respectively, the opposite holds true at equilibrium. Leaning on theoretical suggestions, landlords in well-developed areas have incentives to hold onto vacancies in view of future rent increases. Our results support this idea, which demonstrates the significantly positive impact of household income and net birth rate on the natural vacancy rate.

Rental Housing and the Natural Vacancy Rate

This study uses 1989–2005 data for the Seattle metropolitan areato test the natural vacancy rate hypothesis for rental housingmarkets using a new methodology. Findings support theexistence of a natural vacancy rate for apartments that varies overtime, and in some cases across apartment submarkets. Resultsshow a decline in the natural vacancy rate in the time periodfollowing the introduction and growth of the Web. Results alsoshow significant differences in natural vacancy rates for differentgeographic subareas. No significant differences in the naturalvacancy rate are found for different apartment types.

Time‐Series Characteristics and Long‐Run Equilibrium for Major Australian Office Markets

While much attention has focused on the modeling of office property markets, little emphasis has been put on distinguishing between permanent and temporary effects. This article attempts to address this issue in the context of the rental adjustment mechanism and the demand–employment relationship for major Australian central business district office markets. It is shown that, by allowing the natural vacancy rate and the work–space ratio to be endogenously determined, it offers richer model specifications that permit a partitioning between long‐run and short‐run influences. This is achieved by employing econometric techniques that examine the stochastic behavior of time series data. It is found that, while equilibrium relationships exist (between the vacancy rate and rent, and demand and employment), other macroeconomic variables are found to be relevant cyclical determinants.

Estimating Natural Vacancy Rates with Unknown Break Points for the Chicago Rental Housing Market

Most empirical studies of the rental adjustment process assume a temporally constant natural vacancy rate (NVR). Such an assumption lacks theoretical support. This paper presents further evidence for the inherently time-varying NVR by detecting a break point in it for the Chicago rental housing market over the 1994:Q1-2005:Q4 period. The break point occurred at 2001:Q4. Its existence can be attributed to the structural changes that the Chicago housing market, as well as the macroeconomy, went through following the 9/11 event. Given the break point, two discrete values for the NVR are estimated, one for 1994:Q1-2001:Q4 and the other for 2002:Q1-2005:Q4.

International Real Estate Review

In this research, cross-sectional data for the township level obtained from the 1990 and 2000 Population and Housing Census are used to study the phenomenon of high housing vacancy rates in Taiwan. Three simultaneous equations for housing price, vacancy rate, and moving rate are derived and estimated using 3SLS. The estimation results show that, in 1990, in a booming market situation, both expected housing price and current housing price had a strong, positive impact on the vacancy rate; however, the housing vacancy rate did not display a negative impact on housing price as expected. The results for 2000 show that housing price did not significantly affect the vacancy rate; however, the vacancy rate had a negative impact on housing price that was highly statistically significant. This result reflected the fact that housing market operation had swung to another extreme after the real estate bubble that started in the late 1980s and burst in the mid-1990s. The natural vacancy rate for each township can be obtained from the estimation results. The average rate for 2000 was 0.11 to 0.12, compared to an actual vacancy rate of 0.158, which implied that 75% of townships had an excess supply of housing. Only Taipei City, Kaohsiung City and townships in areas inhabited by Taiwan’s indigenous peoples had, on average, a relatively low excess supply rate.

Natural vacancy rates in global office markets

PurposeThis paper seeks to contribute to knowledge of the dynamics of global office markets with an assessment of the interaction of rental growth and vacancy rates across a sample of the world's leading office markets.Design/methodology/approachEconometric methods are used to estimate the relationship between rental growth and vacancy rates (taking into account the possible simultaneity between the two variables) and these equations are then used to estimate the natural vacancy rate at an individual city level and collectively for the three regions assessed (Europe, Asia Pacific and North America). An estimate is also made of the global natural vacancy rate.FindingsThe results suggest that estimates of natural vacancy rates vary significantly across the world but these estimates can be helpful to those seeking to understand global office markets. European markets in general have lower natural vacancy rates than those in North America. In Asia Pacific markets there is a greater variation between markets. In general developed markets have lower natural vacancy rates than developing ones. In developing markets the concept of a natural vacancy rate is one that should be applied with care, given the weakness of data and the speed with which they are undergoing structural change. When examining the differences in natural vacancy rates between markets, it is clear that fundamental supply and demand factors are key in driving those differences.Practical implications“Rule of thumb” estimates of natural vacancy rates are relatively common. However, a robust methodology for calculating natural vacancy rates is a powerful analytical tool for investors, occupiers and real estate advisors, as it enables a judgement of what supply/demand balance will trigger rental growth.Originality/valueIn estimating the natural vacancy rate across a sample of the world's leading office markets the paper makes an original contribution to the understanding of global office markets and in particular delivers an appreciation of how rental growth and vacancy rates interact.

Tax Structure and Natural Vacancy Rates in the Commercial Real Estate Market

A number of studies have postulated that the Economic Recovery Tax Act of 1981 (ERTA 1981) was responsible for the dramatic overbuilding that occurred between 1981 and 1986, primarily because returns became less sensitive to “real” demand. While there has been much research on how equilibrium or “natural” vacancy rates in the real estate market are determined, beginning with Rosen and Smith's seminal paper in 1983, virtually none of this work has dealt with the impact of the tax environment. This study makes an initial attempt to answer this question with respect to equilibrium vacancies resulting from tenant (or owner) turnover. A formal model is developed that considers as an objective function the landlord's desire to maximize his/her after‐tax equity returns in an environment of monopolistic competition in which individual projects face downward‐sloping demand curves, owing to market conditions and a degree of heterogeneity among tenants in search costs or some other characteristic. The natural vacancy rate is shown not to depend directly upon the tax environment, but to depend indirectly upon it only to the extent that equilibrium market rents are lowered. The nature of the vacancy response depends critically upon the shape of the tenant demand response relationship upon its transition to a lower‐rent region. This response is interactive with the degree of turnover and supply responsiveness within individual markets.

Estimating Natural Vacancy Rates in Office Markets Using a Time-Varying Model

This study presents estimates of a time-varying, dynamic adjustment model of the office market using time series data from Hong Kong, Sydney, Perth and London. It aims to demonstrate that the natural vacancy rate of office property can be fitted into a time-varying framework. The model innovates in considering the stochastic nature of natural vacancy rates. The data shows that the stationary component of natural vacancy rates tends to differ across cities.

Rental Housing Markets, the Incidence and Duration of Vacancy, and the Natural Vacancy Rate

New intermetropolitan and time-series data from the BLS are used to derive and model the incidence and duration of rental vacancies and to assess their importance to the price adjustment mechanism for rental housing. Research findings indicate that duration varies with measures of MSA housing costs and housing stock heterogeneity, while incidence varies with measures of population mobility, public housing availability, and population growth. Results support a more general specification of rental price adjustment in which the rate of real rent change reflects deviations in observed vacancy incidence and duration from their equilibrium levels. The research provides new estimates of equilibrium vacancy rates for a large set of metropolitan areas over the 1987–1996 period.

The natural vacancy rate of the Singapore office market

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.

The rent-vacancy relationship in the rental housing market

Drawing on analogies between the housing and labor markets, housing economists now recognize the potential importance of vacancies in housing market adjustment. Rosen and Smith (1983, Amer. Econ. Rev. 73, 779–786) found that rent changes are related to deviations in the vacancy rate from the natural vacancy rate. Other empirical studies, in contrast, have found that raw vacancy rates bear little relation to rent movements. This paper develops a theoretical model with a Diamond-type random-matching mechanism, which attempts to reconcile these seemingly contradictory empirical findings.

Atypicality and the Natural Vacancy Rate Hypothesis

This paper formulates and tests a model of rent change based on the natural vacancy rate hypothesis. It incorporates the Haurin [6] hypothesis in which the natural rate for particular units is determined by their atypicality. Estimates of the model indicate a natural rate of 6.5%. However, the rate is shown to vary systematically across individual units: the more atypical an apartment unit, the higher the natural rate.

Rental Housing Markets and the Natural Vacancy Rate

This paper employs new census vacancy rate data to analyze the price‐adjustment mechanism for rental housing. The study extends previous research on this topic, which provided conflicting evidence concerning the traditional theory of rental housing market adjustment (see Smith [10], [11]; DeLeeuw and Ekanem [2]; Eubank and Sirmans [4]; and Rosen and Smith [8]). Cross‐section and time‐series data are pooled to estimate natural vacancy rates for sixteen United States cities for the 1981–85 period. The analysis further explores the determinants of variation in natural vacancy rates across those metropolitan areas.

Advertising and Natural Vacancies in Rental Housing Markets

We formulate a model that explains vacancy durations arising from lags in matches between the suppliers and demanders of housing units. We emphasize rental housing markets in this exposition although the model could be extended to competitive or noncompetitive rental or home‐ownership markets. In the case of rental markets, if tenants do not immediately inform landlords upon initiating search for a new unit, landlords are delayed in their search for a new tenant. These matching delays induce a positive natural vacancy rate that cannot be reduced to zero, even in competitive markets. Price‐taking landlords are, however, able to affect the resulting vacancy duration through advertising in a Cournot‐Nash equilibrium and will, in general, invest in inefficient levels of advertising. As a consequence, there may be a role for public policy to provide incentives that would induce noncooperative landlords to choose the vacancy cost‐minimizing advertising solution.