Article:

Office Market Dynamics in Madrid: Modelling with a Single-Equation Error Correction Mechanism

Author: Ramiro J. Rodriguez, Simon Sosvilla-Rivero

Abstract:

This paper seeks to explain Madrid's office market dynamics using cointegration models. Specifically, we focus on the equilibrium path of stock, vacancy rates and letting rents and feedback with two exogenous economic determinants, namely service sector employment and GDP. We apply for the first time a single-equation error correction mechanism (ECM) to a system of equations for Madrid's commercial property market and examine its accuracy when compared to the more frequently used classical two-step ECM. The main findings to emerge from our empirical analysis are that rents and vacancy rates react rapidly when they do not correspond to their equilibrium level. Stock, as expected, responds more slowly when it does not correspond to its long-term path. We draw on quarterly observations for Madrid's market between 2001:Q1 and 2015:Q2.

Keywords

Error correction model, Office market, Single-equation error correction mechanism

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