Journal of Real Estate Finance and Economics, 24:1/2, 59±87, 2002
# 2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Explaining Real Commercial Rents Using an Error
Correction Model with Panel Data
Department of Land Economy, University of Aberdeen, Kings College, Aberdeen
This paper presents rent models for retail and of®ce property in the United Kingdom. Panel data are used covering
eleven regions for 29 years, enabling us to overcome the limitations of a relatively short time series. We use an
error correction model (ECM) framework to estimate long-run equilibrium relationships and short-term dynamic
corrections. The combination of panel data and an ECM is an innovative approach that is still being developed in
economics. We construct newsupply series that combine infrequent stock data with more frequent construction
data. Separate regional models are estimated for retail and of®ce properties. The regions are then combined into a
number of panels on the basis of the income and price elasticities in the long-run and short-run models. Unlike
previous studies, we ®nd no evidence of a board north±south divide between low growth and high growth regions.
Like these studies we do ®nd a London effect: in London, demand elasticities for space with respect to both price
(rent) and income are much lower in magnitude. We conclude that, while the economic drivers may vary, there is
no evidence of differences in the operation of the regional property markets outside London. Elasticities for retail
and of®ce are similar. Our ®nal models are parsimonious with single measures of economic activity and of supply
and always support the use of an ECM.
Key Words: panel estimation, error correction, regional rent models
Forecasts of rent are a fundamental input into both individual property valuations and the
construction of optimal portfolio allocations. Until the last decade, the short time series
data available for rents tended to limit the scope and reliability of econometric models of
rents. More recently, with nearly 30 years of data available in the United States and the
United Kingdom, and with developments in time series analysis and econometrics
software, there has been a substantial expansion in the modeling of commercial property
markers (Ball et al., 1998). In this paper, we apply one of the most recent approaches in
econometrics, an error correction model (ECM) with panel data, to explain real retail and
of®ce rents in eleven U.K. regions.
The published work on property market modeling is dominated by U.S.- and U.K.-based
Author for correspondence: Dr Michael White, Department of Land Economy, University of Aberdeen, Kings
College, Aberdeen AB24 3UF.