Asymmetric Dynamics of Rent and Vacancy Rates in the Tokyo Office Market

Abstract

In recent years, it has been shown that the dynamics of office markets are asymmetric depending on the market conditions and the direction of supply and demand shocks. However, the actual state of asymmetry varies significantly from market to market, and an overview of the discussion is needed. In this study, we test our hypothesis on asymmetric dynamics in the Tokyo office market, one of the world's largest markets. We employ the rent-adjustment process model proposed by Englund et al. (2008), an improved and more realistic version of the error correction model that captures the interaction between rent, vacancy rates, and stock. The data of the Tokyo office market range from January 2000 to September 2015 and cover ten regions. The results reveal that the mechanism of rent and vacancy rate fluctuation depends largely on the direction of change in supply and demand and on market conditions, especially the upward and downward movements of rents. It is also shown that increases in demand and supply not only encourage rents toward equilibrium, but also have the effect of overshooting them. These results can be valuable in properly capturing future shocks in demand and supply.