Toward a Model of the Office Building Sector

Abstract

High rise office buildings represent large capital outlays in very competitive markets. Investment and development decisions require careful market analysis to assure sufficient demand to lease the office space at rental rates which will make the venture financially attractive. Present methodology for analyzing future commercial real estate market conditions can at best be said to be inadequate. This methodology relies on concepts such as “market absorption” rates and “normal” vacancy rates. These concepts usually rely on accounting type and trend line techniques to provide forecasts of space demand. In this paper we provide an alternative methodology for forecasting the key variables in the office space market by developing a statistical model of supply and demand. The key variables that need to be forecasted are the stock of office space (in square feet), the flow of new office construction (in square feet), the vacancy rate (in percent), and the rent for office space (net rent per square foot).