Projections in the Industrial Property Market Using a Simultaneous Equation System
Thompson, Robert, Tsolacos, Sotiris, The Journal of Real Estate Research
This article is the winner of the Industrial Real Estate manuscript prize (sponsored by the Society of Industrial and Office REALTORs) presented at the 1999 American Real Estate Society Annual Meeting.
A three-equation simultaneous system is used to model the industrial property market in Great Britain. Strong relationships are found between new industrial building supply and both real rents and construction costs, and between rents, industrial floorspace availability and the gross domestic product. The performance of ex post simulations of new building supply, rents and floorspace availability are satisfactory with the exception of rent simulations post 1993. The central forecast of the model indicates a quiet market until 2001 (lower level of new supply, constant levels of real rents and increasing availability of industrial space) but a more active market in 2002 and 2003. This study suggests that simultaneous equation models can prove useful alternative tools in analyzing the industrial property market and generating forecasts both at the aggregate and more localized level of analysis.
Existing empirical work on industrial property markets has resulted in a better understanding of the workings of this market. This research has produced valuable findings on the nature of the influences determining industrial market behavior and adjustments. Developers, investors and others with an interest in industrial property have at their disposal a set of information regarding the forces that affect demand for industrial space, industrial price determination and the supply of new industrial space. Of particular significance to the investigation of these issues has been the quantitative analysis that many researchers have undertaken. Quantitative studies have provided a very useful means to empirically investigate processes in the market based on different theoretical premises and utilizing alternative methodologies. The outcome has been an increasing amount of empirical evidence on key relationships in the industrial market.
The quantitative literature on the industrial property market is dominated by studies that have shed light on the factors that govern the variation in rents and prices and in industrial property development. Industrial rents are impacted by macroeconomic and industrial sector trends and variables such as the gross domestic product and manufacturing output have appeared significant in current work (RICS, 1994; and Thompson and Tsolacos, 1999). Other research has found that the variation in rents and the value of industrial property is explained by monetary variables and industrial production (Atteberry and Rutherford, 1993), by general and local market conditions (Hoag, 1980; and Buttimer, Rutherford and Witten, 1997), and by property and location specific factors (Ambrose, 1990; Baum, 1991; Fehribach, Rutherford and Eakin, 1993; and Lockwood and Rutherford, 1996). More recently, Thompson (1998) proposed an empirically defined quality standard for industrial property, scoring the various aspects of an industrial building and its immediate environment and correlating this with independently derived estimates of rental value.
Similarly, the literature has identified key variables that drive the supply of new industrial space. Macroeconomic and financial variables including the gross domestic product, manufacturing output, employment, unemployment, interest rates and the cost of capital appear to be important determinants of new industrial building production (Nicholson and Tebbutt, 1979; Barras and Ferguson, 1987; Wheaton and Torto, 1990; Kling and McCue, 1991; RICS, 1994; Giussani and Tsolacos, 1994; and Tsolacos, 1995). RICS ( 1994) have found support for industrial rent and the employment/floorspace ratio variables. Two other studies by McGough and Tsolacos (1995a, 1997) demonstrate the regularities between the industrial property development cycle in relation to the cyclical movements of key macroeconomic, financial and property market aggregates in the United Kingdom. …