A Building Cycle Model for an Imperfect World

Abstract

A model of the building cycle is presented, expressed in terms of endogenous fluctuations in development activity, vacancy and rents around an equilibrium growth path. The dynamic behaviour of the model is determined by lags in three adjustment processes: the occupier response to changes in rents, the development response to demand changes mediated through a rent adjustment process, and the construction delay between starts and completions. The frequency and severity of the cycle depend upon the values of five key parameters including the construction lag and the transmission coefficient linking vacancy to development starts. The model has been fitted to data for the City of London office market, yielding estimates for key parameters that are consistent with its observed cyclical behaviour.