High- and low quality vacancies on the commercial real estate market in Stockholm CBD

University essay from KTH/Fastigheter och byggande


Vacancies are an everyday concept in the real estate world and are used frequently in the commercial office leasing market to describe empty premises that awaits a tenant. The concept of natural vacancies is not as recognized, but just as important. This concept aims at the vacancies the market would experience even though it was in an equilibrium state, where supply meets demand. It is at this vacancy level property owners seek to retain in their portfolio to meet future demand and to keep the option to rent to tomorrow's higher rental listings.

Differences between the actual and natural vacancy rate occurs because of friction that is created when demand and supply cannot move at the same pace. The frictions arise due to it is time consuming and a costly process to match premises with possible tenants, both for property owners and tenants. Even if there were no costs associated with changing premises or that it would not be a time consuming process, there would still be vacancies in the market due to the fact that it exist more than just one lease period.

The concept of natural vacancy rates are not only an important concept to describe frictions or strategies based on the property owner's point of view. According to (Sanderson, Farrelly, & Thoday, 2006)the exact value of the vacancy level will not determine whether or not any given real estate market is at its equilibrium. Rather, it is the difference or gap between the actual and natural vacancy rate that determines the deviations from equilibrium in the rental adjustment process.

On the basis of studies on the subject natural and actual vacancy rates is a clear correlation between changes in rental listings and actual vacancies in the market. It is also here, if we assume that there are no changes, we can measure the natural vacancy rate the market consists of. Because the natural vacancy rates are not as readily observable or measurable as the actual vacancy rate is

, it requires transparency and a wide information flow to provide the ability to accurately measure it. However, the natural vacancy rate is a very useful tool both for the landlords and tenants at strategic decisions making. If the natural vacancy rate would be as commonly used as the actual market vacancies then the market would become more elastic and the frictions would decrease. The understanding of how the actual vacancies interact with changes in rental listings and what levels of natural vacancies they generate may be an important tool for establishment on the market. It is also useful tool for the understanding of what generates changes in rents when more traditional forecasting tools are struggling with their estimates.

Since the purpose of this work is not at all to investigate the natural vacancy rate, it gives us better understanding of what I want to examine in this work

. Since the studied articles are using the today generally measured vacancy rate, I will examine how this can be made more specific. I also want to show that all vacancies are not able to explain the changes in rental listings as well. Since no previous studies have been done on this subject, I will first examine what factors seem to explain the perceived quality of a property. Investigation is made with the objective of demonstrating the possibility of dividing the vacancies in the office leasing market after the perceived quality of a property and then also the premises. To simplify the categorization I assume only two different levels of quality, high-quality and low-quality real estate, but also realize that there are more levels of perceived qualities when the term can be considered subjective.

After the investigation is made the best explanatory variable is assumed to be used for the leveling of high-and low-quality vacancies. The classification is then used to develop the model for natural vacancies. The study is based on the work hypothesis.

High-quality vacancies affect the change of rental listings negatively, while low-quality vacancies do not affect the notes at all.

Where the hypothesis is that changes in rental listings better explained and are more affected by high quality vacancies than what low-quality vacancies can.

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