Real effective rent determination: Evidence from the Sydney office market

Summary The rental adjustment equation usually estimated provides no relationship between the levels of actual and equilibrium rents, requires substantial overshooting of the natural rate in response to supply or demand shocks to the market, and cannot hold simultaneously for leases of different terms. These flaws are overcome by relating the percentage change in real effective rents to gaps between both the natural and actual vacancy rates and equilibrium and actual real effective rents. Annual data from the Sydney office market during the 1970–1993 period are consistent with the expanded adjustment equation.