An econometric analysis and forecast of the Central London Office Market : single model versus aggregate submarket models
Author(s)Waisnor, Matthew E. (Matthew Edward)
Massachusetts Institute of Technology. Center for Real Estate. Program in Real Estate Development.
William C. Wheaton
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This paper examines and projects fundamental characteristics of the London Office rental market which is facing supply and demand issues in upcoming years despite being considered one of the few safe haven places for real estate investors during the recent worldwide financial uncertainty. The paper divides the Central London market into four submarkets: Docklands, Midtown, City, and West End. The key issue the paper will examine, aside from projecting future market fundamentals for a 10 year period, is whether on an econometric analysis level it is better statistically to analyze the market utilizing one singular model or to model each submarket separately then sum the outputs. First, the paper will discuss the history and development of the economic model, then discuss what papers have analyzed the London office market utilizing econometric models, and finally what previous studies have examined submarkets utilizing econometric models. Next, the paper will analyze what's occurred from 1986-2012 and try to offer some explanation of why the markets have behaved the way they have on a submarket and aggregate level. Next, the paper will present the model utilized to project the conditions for 10 years and examine back tests for the previous five years (2008-2012) to examine how well the model would have predicted the actual events of the time period. This study derives three main econometric equations for each submarket and Central London as a whole. The rental equation is explained by a lag of one year of rent and the current quarter's vacancy. The demand equation is explained by a 1 year lag in occupied stock, the current level of government service employment, the current level of fire, insurance, and real estate employment, and a four year lagged vacancy. The supply equation is explained by a 1 quarter lag in yield, a 1 year lag in yield, the current bond rate, the current real rental rate, a 1 quarter lag in real rental rate, and the spread between 10 year government bonds and corporate bond rates. The model is utilized both on each submarket and on the Central London market as a whole. Finally, the paper examines the differences in aggregating the submarkets versus modeling Central London in one model. This is done by comparing the models outputs for the previous 5 year back test and also for the 10 year projections.
Thesis (S.M. in Real Estate Development)--Massachusetts Institute of Technology, Program in Real Estate Development in Conjunction with the Center for Real Estate, 2013.This electronic version was submitted by the student author. The certified thesis is available in the Institute Archives and Special Collections.Cataloged from student-submitted PDF version of thesis.Includes bibliographical references (pages 81-82).
DepartmentMassachusetts Institute of Technology. Center for Real Estate. Program in Real Estate Development.
Massachusetts Institute of Technology
Center for Real Estate. Program in Real Estate Development.