Downward-Sloping Term Structure of Lease Rates: A Puzzle

24th Annual European Real Estate Society Conference, 2017

In this paper, we analyse the drivers of the office lease market with a particular emphasis on components such as lease duration and leased area as rent determinant. Using a leasing game, we built-up a conceptual framework to determine the terms of the leases-regarding duration, size of premises, conditions-negotiated between landlords and tenants. This model allows us to derive conclusions on the leasing market structure and in particular on bargaining power. In particular, we show why longer leases can command a premium under some market conditions. The conditions leading to opposite results are also discussed in the paper. Using data from Costar for New York City and Chicago, we discuss lease rates in light of our theoretical model. In particular, we find that, for both markets, the rent-size relationship is not monotonic but rather U-shaped, with unit rent, hence the premium to the landlord, rising beyond a given surface threshold.

The multifamily housing (apartment) market has been the subject of academic research for decades. 1 Special attention has been paid to the interaction between effective rents and vacancy rates, and many studies have investigated how market rents respond to changes in the vacancy level. The existing literature, however, has two limitations. First,

2016

Despite the significant decrease in housing prices during the collapse of the Japanese bubble in the first half of the 1990s, housing rents hardly changed at all. Why is it that housing rents do not change? Why are housing prices and housing rents not linked? In this paper, in order to address these questions, we conducted an alternative indicators for housing services in CPI. First, we found that the annual proportion of residential units whose rent changed was no more than about 5%. This is extremely low, representing 1/20 of the figure for the U.S. and 1/6 of the figure for Germany. The underlying reason for this high degree of rigidity is the specific circumstances of the Japanese housing market, where opportunities to change rents are inherently limited due to the fact that tenant turnover is low while the duration of rental contracts is two years. Even more important, however, is the fact that rents are not changed even when opportunities to change them arise such as tenant tu...

Real Estate Economics, 2008

Markets for property space adjust only gradually because tenants and landlords are constrained by long-term leases and transaction and information costs. Not only do rents adjust slowly, but space occupancy, which depends on historical rents, often differs from demand at current rent. This creates "hidden vacancies," vacancies that will develop in the future if market rent and the space demand driver are unchanged. That is, if current rent is greater/lesser than average rent, then hidden vacancies are positive/negative. Moreover, because of hidden vacancies, open vacancies and rent are not mirror images of each other. Thus it is necessary to estimate both rental and vacancy rate adjustment processes. We do this using annual data for Stockholm offices during the 1977-2002 period and simulate the response of rent and vacancies (open and hidden) to an employment shock.

Policy Research Working Papers, 1998

We consider a rent control regime where rent increases on, and eviction of, a sitting tenant are not allowed. However when an apartment becomes vacant the landlord is free to negotiate a new rent. We argue that this stylized system is a good (though polar) approximation for many rent control regimes existent today in several U.S. cities and the world over. Under such a regime, if inflation exists, landlords prefer to rent to short-staying tenants. Tenants are of different types, where type refers to the amount of time they stay in an apartment, and landlords are unable to determine types before they rent to tenants. Since departure date contingent contracts are forbidden, an adverse selection problem arises. In this case, short-stayers are harmed by rent control while long-stayers benefit and landlord's profits remain the same, and, in addition, the equilibrium is Pareto inefficient. We show that when tenant types are determined endogenously, then in the presence of rent control there may be multiple equilibria where one equilibrium is Pareto dominated by another equilibrium. The abolition of the rent control regime, can not only shift the equilibrium out of this inferior outcome, but can also result in an across-the-board lowering of rents.

SSRN Electronic Journal, 2000

ing our study prior to the Great Recession. Which variables correlate with rent growth: Location? Age? Rent level? Occupancy duration? Structure type? The answers deepen understanding of the rental market, help statistical agencies make decisions about sample stratifi cation and substitution, and expose coverage problems. We document signifi cant rent stickiness. Initial relative rent level is the best predictor, though mainly due to mean reversion. "Location" comes in second, though often not statistically signifi cantly: the relative value of location is persistent. Age and occupancy duration are also notable. Our fi ndings are reassuring to statistical agencies.

Journal of Financial Intermediation, 2010

We develop a non-tax rationale for leasing in a double-sided asymmetric information setting, and analyze how various contractual provisions in leasing contracts arise in equilibrium. In our model, a manufacturer of capital goods has private information about their quality; entrepreneurs (users of these capital goods) come to learn this quality only by using them over a period of time. Each unit of the capital goods requires a certain level of maintenance in each period. Entrepreneurs differ in their cost of providing this maintenance; this maintenance cost is information private to each entrepreneur. Leasing emerges as an equilibrium solution to this double-sided asymmetric information problem. Various contractual provisions in leasing contracts (e.g., short-term versus long-term leases with non-cancellation provisions, option to buy at lease termination, and service leases) also emerge as equilibrium solutions under alternative settings. Leases with metering provisions emerge in equilibrium when, in addition to the maintenance cost, entrepreneurs differ in other dimensions, such as their intensity of usage of the capital good. Our model has implications for the lease-versus-sell decision, the situations under which various leasing contract provisions will be used, and for the relative magnitudes of sales prices and leasing costs (for leases with different contractual provisions).

Managerial Finance, 2009

Leasing evaluation is a subject that has drawn significant interest in economic circles for many years. The numerous models proposed in the literature have approached the topic from a variety of outlooks and approaches. The contributions made to date, however, all share what would appear to be an unwritten premise: namely, that leasing evaluation logically occurs prior to the start of the leasing relationship. The purpose of the work is eliminate this premise, in order to take an inprogress approach to the evaluation of leasing.

Most theoretical models predict that debt and leases should act as substitutes. While the preponderance of evidence supports this claim, there remain significant cases where debt and leases appear to be complements. One of the problems with prior research is that it is difficult to properly control for the changing asset base associated with leasing in cross-sectional tests. To overcome this problem, we examine a sample of sale-and-leaseback (SLB) transactions where the assets of the firm are not changed due to the lease. We find evidence of a substitution effect between leases and long-term debt in our overall sample. We also find, however, that 40 percent of the firms exhibit evidence of a complementary relation by increasing their debt after the SLB transaction. To further explore this relation we divide the sample into two groups, those that show an increase in debt and those that show a decrease in debt after the SLB transaction.

Springer Optimization and Its Applications, 2017

We develop an equilibrium-econometric analysis in the context of rental housing markets with indivisibilities. The theory provides some bridge between a (competitive) market equilibrium theory and a statistical/econometric analysis. First, we develop this theory: The listing service of apartments, which we call the housing magazine, provides the information to both households (and landlords) and the econometric analyzer. Our theory explains this double use of the information sources. We apply our theory to the data in the rental housing markets in the Tokyo area, and we examine the law of diminishing marginal utility for the household. It does not hold at a significant degree for the marginal utility with respect to the size of apartment, but it does strictly with respect to the commuting time-distance and consumption other than the housing services.

Proceedings of Business and Economic Studies

Financial leasing is a financial innovation product with leasing and financing functions. The research on the theory of financial leasing and risk pricing methods should be highly valued. Rent is set based on the total revenue of the lessor and the total cost of the lessee. The factors that affect pricing include project costs, security deposits, fees, lease terms, revenue, interest rates, etc. Using the principle of net present value to elaborate the components of financial leases and constructing a financial lease pricing model from the perspective of maximizing the profit and interests of the lessor, an empirical analysis of the model was carried out using an actual case, thus concluding that the model is effective.

Journal of Property Investment & Finance, 2010

PurposeThis paper has two aims: to consider the negotiating strength of landlords and tenants in lease negotiations; and to calculate the level of deposit which is necessary to mitigate income risk.Design/methodology/approachThe paper reviews the existing literature on the negotiation strength between landlords and tenants in different stages of the property cycle; investigates the well established deposit system in South Korea for lessons that might be applied in the UK; estimates the appropriate level of deposit using simulation methodology, given different states of the market; and places the contractual arrangement in a legal framework.FindingsEvidence from the Seoul office market suggests that deposits can be very effective in protecting income return. In the UK during the down phase of the cycle, when supply of space exceeds demand and business conditions are uncertain, tenants are unwilling to pay deposits and landlords are more inclined to offer incentives in a bid to get th...

Review of Urban & Regional Development Studies, 2000

This paper reports on the estimation of housing demand for tenants in Tokyo Metropolitan Region using household level data for 1993. The results indicate that the rental housing demand is inelastic with respect to permanent income and price, with coefficients as 0.31 and -0.093 respectively. Other important variables, which determine housing demand for tenants are length of stay and type of household. Larger households demand more housing. However, keeping the size of household constant, households with elderly members have higher demand for housing. The only exception to the rule is households formed with members not belonging to same nucleus family demand less housing.

Every human being in this world must definitely be able to defend themselves. There are many ways that people take to maintain their lives. One way that can be taken to maintain his life is to run a business. Along with the times, the business world has become increasingly widespread. With the development of the business world, the need for funds is inevitable both by individuals and business people who are members of a legal entity in developing their business and in improving the quality of their products, so that a satisfying profit and level of needs can be achieved. others. To meet these funding needs, more and more people are establishing a financial institution that is engaged in the provision of funds or goods that will be used by other parties in developing their business.

2008

Why was the Japanese consumer price index for rents so stable even during the period of housing bubble in the 1980s? In addressing this question, we start from the analysis of microeconomic rigidity and then investigate its implications about aggregate price dynamics. We find that ninety percent of the units in our dataset had no change in rents per year, indicating that rent stickiness is three times as high as in the US. We also find that the probability of rent adjustment depends little on the deviation of the actual rent from its target level, suggesting that rent adjustments are not state dependent but time dependent. These two results indicate that both intensive and extensive margins of rent adjustments are very small, thus yielding a slow reponse of the CPI to aggregate shocks. We show that the CPI inflation rate would have been higher by one percentage point during the bubble period, and lower by more than one percentage point during the period of bubble bursting, if the Japanese housing rents were as flexible as in the US. JEL Classification Number : E30; R20