Program Background

From the late Seventies through the mid Eighties there was a nation-wide boom in the construction of office space. Supply of office space far outstripped demand. As a result, vacancies continue at rates above any possible definition of equilibrium in most cities.

The recession of the late Eighties and early Nineties along with downsizing trends of corporate America continue to plague investors and lenders. Values have dropped and prospects for a quick recovery are slim.

Tax-induced development and non-recourse lending that allowed a "field of dreams" mentality to pervade office market demand analysis has finally given way to a new reality. Today, office market research is not merely part of a package required by lenders and syndicators, but a critical part of the new reliance on professional ex-ante market analysis. Suddenly research is not only performed for cosmetic appearance, but for real content and input into key development, investment, and ownership decisions.

Supply and demand conditions for office markets have proven extremely difficult to forecast with accuracy. This difficulty arises, in part, on the supply side where speculators/investors make planning decisions with very limited information sometimes overshooting demand. The demand side is also quite lumpy. There may be substantial shifts in requirements, creating structural changes in the space market.

Local market forecasts are generally proprietary in nature, provided by consultants without the ability of the user to easily compare process or quality. Much intuition and judgment goes into the selection of such consultants, who are continually searching for approaches and data that will improve their forecasting abilities at reasonable costs. Because of data availability, most academic forecasts of office market trends have typically concentrated on the regional or national levels. Academics could enhance market analysis at the local level if adequate local data were available.

Clearly, there is a market for improved office market analysis at the local level. This includes comparison of process as well as comparison of data and information sources. In an effort to address these needs, the Homer Hoyt Institute began an office market research program in 1988. The focus of this work program was to study the forces impacting local market decisions.

Program Objectives

The objectives of such research include the following:

• Develop better theoretical models of the local office market that recognizes the competitive differences among geographic submarkets and the importance of office quality;
• Test and refine these models with available data- bases;
• Employ the models to generate forecasts of office space demand and rental prices in local areas;
• Promote applied research that focuses on specific problems,such as inventory of space, vacancies, etc., in local office markets; and
• Promote improved information access and reliability by encouraging vendors to develop improved data banks of specific variables of importance to owners/consultants/decision makers.

Throughout this entire work program, HHI has attempted to establish research and analyses that will be transferable among local markets. Generalizability is a key to building efficient and relevant models. Also, given reasonably comparable data availability, HHI researchers will be able to develop analyses comparing both inter- and intra-metropolitan patterns of office demand and supply.

The ensuing pages describe the research to-date and its relationship to the stated objectives of the program. On page 3 is a list of some of the major projects along with the lead researchers and their academic affiliation.

Progress and Achievements

Objective: To encourage the development of better theoretical models of the local office market that recognizes differences among geographic submarkets and the importance of office quality.

This objective has been addressed in two ways. First, HHI has sponsored the development of an econometric model, which is an attempt to create a mathematical model of all significant interrelated economic phenomena affecting the office market. The chief researcher in this project has been Henry Pollakowski at the Joint Center/Harvard, with significant contributions by Lloyd Lynford from REIS Reports and John Clapp from the University of Connecticut. The model was designed to specify the demand for office space as a function of employment, real rent in the area, real rent in adjoining areas, and a set of zone-specific variables. The model output is comprised of absorption rate forecasts for submarkets. In addition, a rent equation is specified.

The second major modelling effort undertaken has been in the area of traditional employment driven by historically based models, known as “judgmental models.” The reason for this term is that critical variable assumptions are often based on expert opinions, rather than extensive empirical research. Judgmental models recognize the limitations and cost problems of acquiring all desired data. Over time “judgments” will be enhanced with emergent research and these models will begin to look more like econometric models.

The most prominent researcher in this area has been Wade Ragas at the University of New Orleans, with the support of Ron Rogers at the University of South Carolina and John Hysom at George Mason University. This model allows users to employ historic data on rentable area, occupancy, absorption, total employment, office employment, and space per worker. The model is composed of a series of spreadsheet templates in which the analyst uses expertise or judgment to estimate variables for which there are no readily available data sources, such as office space per worker. The analyst goes through a series of templates which yield a forecast of supply and demand for office space, absorption rates, and rental price.

Objective: To test and implement these models with available databases.

The lack of timely quality data is a major obstacle in office market analysis. Statistics on office market activity are privately collected by data vendors, brokerage firms, market research firms, and others. Generally, these companies do not readily permit access to their data because the information either constitutes a business advantage over their competition, or is the primary source of their income.

HHI secured the cooperation of REIS Reports for a test application of the econometric model in the Boston area. It is conceivable that this and other industry contacts might be strengthened over time to allow for greater access, possibly through the research roundtable or the newly formed Coalition for Industry-Academia-Public Interest Relations. In the meantime, HHI has developed a number of significant databases of office market statistics through the data program and is currently seeking the involvement of more industry data vendors in the process.

For example, HHI provided funding for the creation of the Geo-Demographic Research Center at The American University (TAU). This center has obtained parcel level assessment data for a number of counties in the Washington, D.C. metropolitan areas. Hoyt Advisory Services (HAS), the wholly-owned subsidiary of HHI, has established a relationship with Donnelley Marketing Information Services. This relationship has already borne fruit in the form of the use of $50,000 worth of Conquest software and data housed at The American University used for research and development with a geographic information system (GIS) platform. TAU specializes in applying spatial analytic techniques to office and other market analyses on the cutting edge of new technology.

Similar relationships are developing at other universities, such as the work of Norm Miller at the University of Cincinnati who is teaming up with LeaseTrend, Inc., a private lease data vendor in the midwest, to provide more useful information to office market analysts. HHI is now in the process of trying to foster the cooperation of leading data vendors around the country with the leading researchers of office markets.

Objective: To promote applied research that focuses on specific problems, data availability, and issues in local office markets in support of the main modelling efforts.

HHI has sponsored a wide range of activities related to the central theme of the project, a decomposition of the factors influencing local office markets. For example, HHI sponsored work by Leon Shilton at Fordham University which studied the turning points of local economies, focusing on selected Texas cities, and using information in their economic bases. This project was designed to provide a methodology for analyzing the longitudinal progression of cities, specifically their changing demand for office space. This type of research is essential in evaluating variations in metropolitan areas across geographic areas.

At Louisiana State University, C.F. Sirmans and John Glascock used the database created with HHI seed money in order to construct a hedonic pricing model for office space in Baton Rouge. The database used for this specific project consisted of a six-year time series with rent and lease information on 300 office buildings in Baton Rouge. This work included an analysis of the factors influencing the variation in quoted rents and vacancies in a local office market, and represents a critical step towards determination of effective rent, which is essential to the overall program. Additional work was done to estimate both rent levels and rent adjustment for various classes of buildings and geographic locations.

At the University of Maryland, HHI-sponsored research by Marie Howland covered a variety of topics. These included a shift-share analysis of office employment patterns, geographic analysis using TIGER files, and creation of a geographically based data set of office buildings in Prince George’s County, Maryland. This data set currently includes Census TIGER files, Department of Economic Development statistics, and Dun & Bradstreet business data obtained from the U.S. Small Business Administration. This work is useful in determining the employment portion of the demand equations for office space at the local level.

Research at the University of South Carolina has also helped to advance the program. Ron Rogers and others have completed a number of projects, including detailed analyses of the Columbia and Houston office markets, as well as research on the portfolio impact of geographical diversification. They have also been working with a number of commercial brokerage firms in an effort to estimate effective rents for the Columbia office market. The effective rent data will be added to the data set. Each of these projects represents an advance in expanding and refining the body of knowledge that the models draw on.

Kerry Vandell, at the University of Wisconsin/Madison, has worked on refinements to a hedonic pricing model, including the incorporation of design quality and market performance for office buildings using a data sample for 102 office buildings in Boston and Cambridge. The work also resulted in an expanded data set, which included rental information, vacancy, amenities, design quality, construction and operating costs, and additional detailed qualitative attributes of design. This work provides a decomposition of some factors that should be considered in modelling both supply and demand of office space.

HHI also sponsored research by Wayne Archer and Marc Smith at the University of Florida. Archer and Smith looked at the factors influencing locational preference in office markets, using Jacksonville, Florida, as a market area. This work focused on a number of different aspects of locational preference, including the role of visual presence, clustering of suburban offices, and the filtering process in office markets. This work is essential in establishing models for lateral movement and other essential components of the program.

HHI awarded a contract to HAS to look at lateral movement of office space users in office markets. This research, done by Robert Pittman of HAS and Will McIntosh of the University of Kentucky, was comprised of a survey conducted in North Palm Beach, Florida. The survey gathered information on tenant characteristics and other forces influencing firms to make lateral office moves within a metropolitan area.

Work currently in progress includes an empirical study of commercial real estate data transactions for the Chicago area, improving the estimation of office space per worker by industry type and job level, modelling suburban office locations using TIGER files, and a large project on office markets cooperatively sponsored with NCREIF.

The Future

HHI is now building upon the past work in the office market field by sponsored researchers and those with independent efforts. The next phase of work will be launched through a coalition of key players from three aspects of the research: academics, institutional researchers, and data providers. On March 12, 1993, there will be a Coalition meeting bringing together key players in office market analysis. The program will be directed by Dr. Norman Miller. New strategic directions will start to take shape in 1993 as we focus on improved analysis, especially including integration of the long run forces affecting office markets of the future.

Published by Homer Hoyt Advisory Studies Institute, Suite 300, The Hoyt Center, 780 U.S. Highway One, North Palm Beach, Florida 33408 (407) 694-7621, Fax (407) 694-7629.