Adjustment in property space markets

"We analyze the joint dynamics of property space markets using an error-correction model, where rent and vacancies adjust to deviations from equilibrium rent and vacancies. The analysis is based on a new lease rent series for the Stockholm office rental market for the time-period 1977 %uF8182002 constructed by standard hedonic methods applied to a data-set of some 2,400 individual leases. Simulations illustrate the separate roles of rent and vacancy rate movements in the adjustment process. We calculate the natural vacancy rate assuming a trending equilibrium. Property markets may be slow to adjust because tenants are constrained by long-term leases and may be slow to adjust to current rents for other reasons. This gives rise to "hidden vacancies" (the difference between space occupancy and demand at the current lease rate). Using our market rent series and the lease-length distribution, we estimate a time series on the average rent on existing leases. We find that most of the variation in hidden vacancies is explained by the difference between demand at current and average rent"--National Bureau of Economic Research web site.