An econometric analysis of the Seoul Office Market dynamics

Abstract

This thesis applies a structural econometric model to the Seoul Office Market to forecast cyclic trends of rent and office space supply. The model consists of two simultaneous equations. The first equation explains office rent by past rent, office employment, and the stock of office space. The second equation explains new office supply by rent and office employment growth. Empirically, the model was tested against the data of the Seoul office market since 1974. The estimated rent equation suggests that rent seems to be fully explained by the immediate past rent, current office employment, and current office stock in the Seoul economy - but only when the previous rental boom in the late 1970s is accounted for with the effect of governmental land use policy. On the other hand, the estimated construction equation suggests that new office supply can be well explained by rent and office employment growth, both lagging long six years. The long lag implies that investors have expected current conditions to prevail in the future, a myopic expectation. This myopic expectation can generate market volatility because by the time a space enters the stock, market conditions have changed. Using the estimated model, ten-year contingent forecasts are made based on three scenarios having different estimated office employment growths. The forecasts for both rent and new supply demonstrate similar cyclic movements in all of the scenarios. In short, the Seoul office market, strongly impacted by the negative economic shock started in late 1997 and the large supply of office space in the 1990s, seems to remain soft or tight for two to three years before rent moves upward and supply reacts. By the middle of the 2000s, however, the market will be fully recovered from the economic shock and it will move toward a strong market.