Home • PRRES Inc. Journal • Read the Journal

Forecasting Office Building Rental Growth Using a Dynamic Approach

Author/s: Marcello Tonelli, Mervyn Cowley, Terry Boyd

Date Published: 1/01/2004

Published in: Volume 10 - 2004 Issue 3 (pages 283 - 304)

Abstract

Numerous econometric models have been proposed for forecasting property market performance, but limited success has been achieved in finding a reliable and consistent model to predict property market movements over a five to ten year timeframe. This research focuses on office rental growth forecasts and overviews many of the office rent models that have evolved over the past 20 years. A model by DiPasquale and Wheaton is selected for testing in the Brisbane office market. The adaptation of this model did not provide explanatory variables that could assist in developing a reliable, predictive model of office rental growth. In light of this result, this paper suggests a system dynamics framework that includes an econometric model based on historical data as well as user input guidance for the primary variables. The rent forecast outputs would be assessed having regard to market expectations and probability profiling undertaken for use in simulation exercises.

Download Full Article

Download the Full Article PDF

14445921.2004.11104164.pdf 14445921.2004.11104164.pdf (349kB)

Keywords

Econometric Modelling - Forecasting - Office Rents - Simulation - System Dynamics

References

  • Bakken, B.E. & Sterman, J.D. (1993). Commercial Real Estate Management Flight Simulator. MIT Sloan School of Management.
  • Barras, R. (1994). Property and the economic cycle: building cycles revisited. Journal of Property Research, Vol. 11, pp. 183–197.
  • Bertsche, D., Crawford, C. & Macadam, S. (1996). Is simulation better than experience? The McKinsey Quarterly, No. 1, pp. 50–57.
  • Born, W.L. & Pyhrr, S.A. (1994). Real estate valuation: the effect of market and property cycles. Journal of Real Estate Research, Vol. 9, No. 4, pp. 455–486.
  • Canter, T., Gordon, J. & Mosbaugh, P. (1996). Integrating regional economic indicators with the real estate cycle. Journal of Real Estate Research, Vol. 12, No. 3, pp. 469–485.
  • Chaplin, R. (2000). Predicting real estate rents: walking backwards into the future. Journal of Property Investment and Finance, Vol. 18, No. 3, pp. 352–370.
  • Clayton, J. (1996). Market fundamentals, risk and the Canadian property cycle: implications for property valuation and investment decisions. Journal of Real Estate Research, Vol. 12, No. 3, pp. 347–367.
  • Cowley, M. (2003). Property Market Cycle., Masters Dissertation, Queensland University of Technology.
  • D’Arcy, E., McGough, T. & Tsolacos, S. (1999). An econometric analysis and forecasts of the office rental cycle in the Dublin area. Journal of Property Research, Vol. 16, No. 4, pp. 309–321.
  • Dehesh, A. & Pugh, C. (2000). The internationalisation of post 1980 property cycles and the Japanese bubble economy, 1986–96. International Journal of Urban and Regional Research, Vol. 18, Iss. 1, March, pp. 147–165.
  • DiPasquale, D. & Wheaton, W.C. (1996). Urban Economics and Real Estate Markets. Prentice Hall, New Jersey.
  • Dobson, S.M. & Goddard, J.A. (1992). The determinants of commercial property prices and rents. Bulletin of Economic Research, Vol. 44, No. 4, pp. 301–321.
  • Dunse, N. & Jones, C. (1998). A hedonic price model of office rents. Journal of Property Valuation and Investment, Vol. 16, No. 3, pp. 297–312.
  • Forrester, J. (1969). Urban Dynamics. Productivity Press, Portland, Oregon.
  • Forrester, J. (1992). Policies, decisions and information sources for modelling. European Journal of Operational Research, Vol. 59, Iss. 1, pp. 42–63.
  • Frew, J. & Jud, G.D. (1988). The vacancy rate and rent levels in the commercial office market. Journal of Real Estate Research, Vol. 3, No. 1, pp. 1–8.
  • Gallagher, M. & Wood, A.P. (1999). Fear of overbuilding in the office sector: how real is the risk and can we predict it? Journal of Real Estate Research, Vol. 17, No. 1, pp. 3–32.
  • Gardiner, C. & Henneberry, J. (1989). The development of a simple regional office rent prediction model. Journal of Property Valuation and Investment, Vol. 7, No. 1.
  • Gardiner, C. & Henneberry, J. (1991). Predicting regional office rents using habit-persistence theories. Journal of Property Valuation and Investment, Vol. 9, No. 3.
  • Giussani, B., Hsia, M. & Tsolocas, S. (1993). A comparative analysis of the major determinants of office rental values in Europe. Journal of Property Valuation and Investment, Vol. 11, No. 2, pp. 157–173.
  • Glascock, J.L., Kim, M. & Sirmans, C.F. (1993). An analysis of office market rents: parameter constancy and unobservable variables. Journal of Real Estate Research, Vol. 8, No. 4, pp. 625–637.
  • Grissom, T. & DeLisle, J.R. (1999). A multiple index analysis of real estate cycles and structural change. Journal of Real Estate Research, Vol. 18, No. 1, pp. 97–129.
  • Hair, J.F. (1998). Multivariate Data Analysis, Prentice Hall, Upper Saddle River, N.J.
  • Hekman, J.S. (1985). Rental price adjustment and investment in the office market. AREUEA Journal, Vol. 13, No. 1, pp. 32–47.
  • Hendershott, P. (1996). Rental adjustment and valuation in overbuilt markets: evidence from the Sydney office market. Journal of Urban Economics, Vol. 39, No. 1, pp. 51–67.
  • Hendershott, P. & Lizieri, C. & Matysiak, G.A. (1996). Modelling the London office market. The Cutting Edge 1996, RICS Research, London.
  • Hendershott, P., Lizieri, C. & Matysiak, G. (1999). The workings of the London office market. Real Estate Economics, Vol. 27, pp. 365–387.
  • Hendershott, P.H., MacGregor, B.D. & Tse, R.Y.C. (2002). Estimation of the rental adjustment process. Real Estate Economics, Vol. 30, No. 2, pp. 165–183.
  • Jones, C. (1995). An economic basis for the analysis and prediction of Local office property markets. Journal of Property Valuation and Investment, Vol. 13, No. 2, pp. 16–30.
  • Kaiser, R.W. (1997). The long cycle in real estate. Journal of Real Estate Research, Vol. 14, No. 3, pp. 233–258.
  • Klammt, F. (2001). Modelling in corporate real estate. 18th International Conference of the System Dynamics Society, Bergen, Norway.
  • Kim, D.H. & Lannon-Kim, C. (1991). Minneapolis’ real estate game: when will it end? The Systems Thinker, Vol. 2, No. 5, pp. 7–9.
  • Kummerow, M. (1997). Commercial property valuations with cyclical forecasts. The Valuer & Land Economist, Vol. 34, No. 5, pp. 424–428.
  • Kummerow, M. (1999). A systems dynamics model of cyclical office oversupply. Journal of Real Estate Research, Vol. 18, No. 1, pp. 233–255.
  • Lyneis, J. (2000). System dynamics for market forecasting and structural analysis. System Dynamics Review, Vol. 16, No. 1, pp. 3–24.
  • MacFarlane, J., Murray, J., Parker, D. & Peng, V. (2002). Forecasting property market cycles: an application of the RICS model to the Sydney CBD office market. 8th PRRES Conference, Christchurch.
  • McDonald, J.F. (2002). A survey of econometric models for office markets. Journal of Real Estate Literature, Vol. 10, No. 2, pp. 223–242.
  • McGough, T. & Tsolacos, S. (1995). Forecasting commercial rental values using ARIMA models. Journal of Property Valuation and Investment, Vol. 13, No. 5, pp. 6–22.
  • Mitchell, P.M. & McNamara, P.F. (1997). Issues in the development and application of property market forecasting: the investor’s perspective. Journal of Property Finance, Vol. 8, No. 4, pp. 363–376.
  • Mueller, G.R. (1999). Real estate rental growth rates at different points in the physical market cycle. Journal of Real Estate Research, Vol. 18, No. 1, pp. 131–150.
  • Mueller, G.R. (2002). What will the next real estate cycle look like? Journal of Real Estate Portfolio Management, Vol. 8, No. 2, pp. 115.
  • Pyhrr, S.A., Born, W., Manning, M.A. & Roulac, S.E. (2003). Project and portfolio management decisions: a framework and body of knowledge model for cycle research. Journal of Real Estate Portfolio Management, Vol. 9, No. 1, pp. 1–16.
  • Pyhrr, S.A., Roulac, S.E. & Born, W.L. (1999). Real estate cycles and their strategic implications for investors and portfolio managers in the global economy. Journal of Real Estate Research, Vol. 18, No. 1, pp. 7–69.
  • Rosen, K. (1984). Toward a model of the office building sector. AREUEA Journal, Vol. 12, No. 3, pp. 261–269.
  • Shilling, J., Sirmans, C. & Corgel, J. (1987). Price adjustment process for rental office space. Journal of Urban Economics, Vol. 22, pp. 90–100.
  • Sivitanidou, R. & Sivitanides, P. (2000). Does the theory of irreversible investments help explain movements in office-commercial construction. Real Estate Economics, Vol. 28, pp. 623–661.
  • Sterman, J.D. (1988). Modelling the formation of expectations: the history of energy demand forecasts. International Journal of Forecasting, Vol. 4, pp. 243–259.
  • Sterman, L.D. (2000). Business Dynamics: Systems Thinking and Modelling for a Complex World. Irwin/McGraw-Hill, Chicago, IL.
  • Tse, R.Y.C. & Fischer, D. (2003). Estimating natural vacancy rates in office markets using a time-varying model. Journal of Real Estate Literature, Vol. 11, No. 1, pp. 37–45.
  • Tsolacos, S. & McGough, T. (1999). Rational expectations, uncertainty and cyclical activity in the British office market. Urban Studies, Vol. 36, No. 7, pp. 1137–1149.
  • Vennix, J. (1996). Group Model Building. Wiley & Sons, England.
  • Wheaton, W.C. & Torto, R.G. (1988). Vacancy rates and the future of office rents. AREUEA Journal, Vol. 16, No. 4, pp. 430–436.
  • Wheaton, W.C., Torto, R.G. & Evans, P. (1997). The cyclic behaviour of the London office market. Journal of Real Estate Finance and Economics, Vol. 15, No. 1, pp. 77–92.