Supply Adjustments to Demand Shocks in the Commercial Real Estate Market

By Lentz, George H.; Tse, K. S. Maurice | Real Estate Economics, Summer 1999 | Go to article overview

Supply Adjustments to Demand Shocks in the Commercial Real Estate Market


Lentz, George H., Tse, K. S. Maurice, Real Estate Economics


The commercial real estate market(1) is frequently observed to be in an extended state of disequilibrium. A partial explanation for the tendency towards disequilibrium is found in the asset attributes of real estate, especially fixity of location, asset heterogeneity, long production times, asset durability and the costliness of real estate development and acquisition. Further explanation is to be found in the characteristics of the commercial real estate market, especially long-term rental contracts and informational inefficiency.(2) Additionally, lending policies of financial institutions and governmental tax policies can exacerbate tendencies towards extended periods of disequilibrium by providing signals to space producers which may or may not be congruent with signals related to changes in space demand.(3)

An extensive body of literature examines the impact of exogenous shocks on prices and on supply and demand adjustments in the housing market. Of particular interest to this study, Poterba (1984) and DiPasquale and Wheaton (1994, 1996(4)) develop useful insights into how housing prices and housing supply adjust to exogenous shocks. DiPasquale and Wheaton (1996)(5) examine how rent and supply in office markets adjust to changes in demand, and provide a rich analysis of the complicated interrelations among demand forces, rent, lease terms, vacancy, supply adjustment parameters and new supply.

To this literature this paper contributes a theoretical investigation of real estate supply adjustments in the commercial real estate market. Simple theoretical linkages between the goods market (the demand side) and the space market (the supply side) are developed and then used to explain the optimal supply decisions of space producers in response to exogenous shocks in the goods market. Optimization models are used to derive propositions relating to how space production decisions are made under conditions of demand certainty, demand uncertainty, and free entry. For purposes of this paper, tax policy and financial variables are held constant, although the models of optimal supply decisions developed below provide a framework for the analysis of capital market influences on the supply of space. The focus of the analysis is on how supply decisions in the space market are linked to production decisions in the goods market, assuming the absence of tax policy and financial innovation. The intent is to lay a theoretical foundation for a more extensive analysis of the process by which the supply of space adjusts to demand shocks.

The analysis in this paper addresses four problems of commercial real estate market adjustment. First, how are supply decisions in the space market related over time to production and capital investment decisions in the goods market? Second, when there is an unanticipated exogenous shock to the goods market, what is the process of short- and long-run adjustment to this shock by the goods and space markets under demand certainty? Third, when faced with an uncertain demand for space, how do space producers determine the optimal supply of space to produce? Fourth, how does free entry affect space supply?

The following section develops a simple production model for the goods market that links the demand for space by the goods producer to its production decisions. The section after examines the process, path and speed of adjustment of the supply of space to changes in space demand resulting from exogenous shocks to the goods market under demand certainty. We then develop an optimal-supply model under demand uncertainty, and use this model to examine how demand uncertainty affects the optimal supply of space. Next we examine how free entry reduces the expected net present value of space, and show how free entry contributes to oversupply. Then we present a simulation of key results that illustrates applications of the demand uncertainty model. The final section presents conclusions. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Supply Adjustments to Demand Shocks in the Commercial Real Estate Market
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.