Implicit Forward Rents as Predictors of Future Rents

This paper investigates the relation between the term structure of rents and future spot rents. A rich database of office rental agreements for various maturities is used to estimate the term structure of rents, and from this structure implicit forward rents are extracted. The data pertain to commercial properties in the three largest Swedish cities for the period 1998-2002. A positive relation between forward and spot rents is found in some regions, but forward rents underestimate future rent levels. Another contribution of the paper lies in the area of rental index construction. We provide evidence that rental indices should not only be quality-constant (i.e. indices should not only control for the characteristics of rental units), but should also be maturity-constant.

[1]  W. Wheaton,et al.  Office Rent Indices and Their Behavior over Time , 1994 .

[2]  C. F. Sirmans,et al.  Retail Leasing: The Determinants of Shopping Center Rents , 1990 .

[3]  J. Fisher,et al.  Development of an Effective Rent (Lease) Index for the Chicago CBD , 1996 .

[4]  Steven R. Grenadier.  An Equilibrium Analysis of Real Estate Leases , 2002 .

[5]  Merton H. Miller,et al.  LEASING, BUYING, AND THE COST OF CAPITAL SERVICES , 1976 .

[6]  Åke Gunnelin,et al.  Term Structures in the Office Rental Market in Stockholm , 2003 .

[7]  Steven R. Grenadier.  Valuing lease contracts A real-options approach , 1995 .

[8]  A. Lo,et al.  THE ECONOMETRICS OF FINANCIAL MARKETS , 1996, Macroeconomic Dynamics.

[9]  Richard H. Thaler,et al.  Anomalies: Foreign Exchange , 1990 .

[10]  James S. Schallheim,et al.  A Model for the Determination of “Fair” Premiums on Lease Cancellation Insurance Policies , 1985 .

[11]  Åke Gunnelin,et al.  Rental Expectations and the Term Structure of Lease Rates , 2003 .

[12]  J. Shilling,et al.  Influence of Rent Differentials on the Choice between Office Rent Contracts with and without Relocation Provisions , 1992 .

[13]  Neil Dunse,et al.  A hedonic price model of office rents , 1998 .

[14]  E. Fama,et al.  Forward rates as predictors of future spot rates , 1976 .

[15]  Neil Dunse,et al.  The extent and limitations of local commercial property market data , 1998 .

[16]  Peter F. Colwell,et al.  Office Rent in the Chicago CBD , 1984 .

[17]  Thomas J. Miceli,et al.  Tenant Turnover, Rental Contracts, and Self-Selection , 1999 .

[18]  John J. McConnell,et al.  Valuation of asset leasing contracts , 1983 .