STRUCTURAL DYNAMICS OF THE OFFICE SECTOR

Abstract

This study uniquely discovers the steady state and general equilibrium dynamics and structure behind the behaviour of Singapore’s Central Area office sector, specifically in explaining its rental rate and net space absorption. Thus, domestic and foreign investors are able to better evaluate their decision-making process in commercial real estate investing. This study develops unique and rigorous structural, expectation-augmented and error corrected stock-flow adjustment models, under the Error Correction Model (ECM) framework to estimate the long-run equilibrium relationships and short-term dynamic corrections for both the rental rate and net space absorption. Important roles of economic factors such as Gross Domestic Product (GDP), employment, prime lending rate, Foreign Direct Investment (FDI) and vacancy are analysed in explaining the rental rate as well as net space absorption. The results show that model estimation for the office rental achieves a very good fit, with the office net absorption achieving a good fit, both in conjunction with the appropriate log forms and serial error correction. The models exhibit well-behaved residuals. The Akaike and Schwarz information criteria, which tests for model selection in order to strike a balance between the goodness of fit and parsimony for the selection of the causal factors, are not excessive for the structural models. It is deduced from the model results that Singapore’s island-state economy is dependent on exogenous factors influencing the trade, industrial, financial and business services sectors that in turn drive the demand for the office sector island-wide.