Markets for property space adjust only gradually because tenants and landlords are constrained by long-term leases and transaction and information costs. Not only do rents adjust slowly, but space occupancy, which depends on historical rents, often differs from demand at current rent. This creates "hidden vacancies," vacancies that will develop in the future if market rent and the space demand driver are unchanged. That is, if current rent is greater/lesser than average rent, then hidden vacancies are positive/negative. Moreover, because of hidden vacancies, open vacancies and rent are not mirror images of each other. Thus it is necessary to estimate both rental and vacancy rate adjustment processes. We do this using annual data for Stockholm offices during the 1977-2002 period and simulate the response of rent and vacancies (open and hidden) to an employment shock. Copyright 2008 American Real Estate and Urban Economics Association

The effect of distance from the city centre on selling price, tax assessment and gross income is investigated for income property in proximity to the city centre. Hedonic estimation with a multiplicative model speci cation is used to estimate the relationship between property characteristics on the one hand and price, assessment and income on the other. The sample consists of centrally located apartment buildings in downtown Stockholm sold during a recent three-year period. The application is speci c to Stockholm, but the methodology and the insights gained are general. The results include the estimation of price gradients for the dependent variables. The models are used for estimating the implicit capitalisation rates in the property market as a function of the distance to the centre. We also estimated where the market appears to place the city centre as implied by the observations. Although no rent gradient was found, we were able to detect a signi cant negative price gradient. The former is reasonable considering the rent control ordinances. The latter indicates the existence of a negative land rent gradient.

Real estate market data often contain outliers in the observations. Since outliers have a large influence on least squares estimates, robust regression methods have been recommended for this situation. Compares the performance of least squares and least median of squares, a robust method, in the estimation of price/income relationships for apartment buildings. Multiplicative models with multiplicative errors are estimated by means of natural log transformations. The study confirms the importance of employing robust methods for this application and implies this may well be so for real estate data sets more generally.

The paper investigates the relation between the term structure of rents and future spot rents. A rich database of office rental agreements for various maturities is used to estimate the term structure of rents, and from this structure implicit forward rents are extracted. The data pertain to commercial properties in the three largest Swedish cities for the period 1998-2002. A positive relation between forward and spot rents is found in some regions, but forward rents underestimate future rent levels. Another contribution of the paper lies in the area of rental index construction. We provide evidence that rental indices should not only be quality-constant (i.e. control for characteristics), but should also be maturity-constant.