Panel Data Modelling of Prime Office Rents: A Study of 12 Major European Markets

Abstract

A significant amount of real estate research has been directed towards developing empirical models explaining rental growth. This paper develops an error correction mechanism (ECM) model which is built on the general theoretical formulation of the Hendershott et a.l (2002a Hendershott, P., MacGregor, B. and Tse, Y. C. 2002a. Estimation of rental adjustment process. Real Estate Economics, 30(2): 165–183. [Crossref], [Web of Science ®] , [Google Scholar]). Income, as measured by local market services output, is used as a key determinant of office demand. A total office stock variable is also used which is derived from the cumulated level of development completions. The model is estimated empirically for 12 office market locations across Europe using panel data techniques and the full sequence of panel model selection tests. The approach allows the behaviour of different markets to be readily compared and contrasted, and provides inferences about intra‐market dependence and the comparative speed of adjustment towards long‐run equilibrium. The study also compares the short‐term predictive performance of the proposed model to a number of alternatives which has been covered in the literature, including a‐theoretical models. The results offer some support for the proposed model for predicting short‐term rental movements.