Disentangling the Short and Long-Run Effects of Occupied Stock in the Rental Adjustment Process



In the current stand of literature on the rental adjustment process starting with Hendershott et al. (Real Estate Economics, 30, 165-183, 2002a, Journal of Real Estate Finance and Economics, 24, 59-87, 2002b) it has become practice to treat the compound variable “occupied stock” as a supply variable. In this study we show that this variable deserves a more critical investigation and that the general view of a supply variable may be misleading. Using panel data covering 30 urban areas for 17 years, we investigate the rental adjustment process in the German office market. The application of recently developed cointegration techniques for non-stationary panel data in conjunction with the corresponding error correction model (ECM) enables us to overcome the data limitations, particularly existent for most European real estate markets. Hence, our primary motivation is (a) to demonstrate how “occupied stock” should be interpreted correctly and (b) to provide useful insights into the long-term relationships and short-run dynamics of real office prime rents. The empirical evidence suggests that a one percent rise in office employment increases real rents on average by 1.64% through higher demand for office space. On the other hand, a one percent increase in the supply of office space decreases real rents in the long run by 2.25%. The results from the error correction model show that deviations from the long-run equilibrium lead to an adjustment process which restores equilibrium within approximately 3 years.


Panel cointegration analysis FMOLS regression Error Correction Model Urban rent models German office market 

JEL Classification

C22 C23 G12 L85 R



The authors are grateful to Thomas Voßkamp from BulwienGesa AG for providing the data and Peter Pedroni for the RATS code for cointegrating vectors in panel data and helpful comments. Furthermore, we thank Heinz Rehkugler, Tobias Rombach, Nico Rottke, Matthieu Stigler, Anthony Strittmatter, Marcel Tyrell, Franziska Wenzel, Joachim Zietz, an anonymous referee, and the participants of the 2009 ARES conference and 2009 IREBS conference on real estate finance and economics for helpful suggestions on various earlier versions. We bear of course responsibility for all remaining errors.


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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.European Business SchoolOestrich-WinkelGermany

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