THE STRUCTURAL DYNAMICS OF THE OFFICE SECTOR IN THE CENTRAL AREA, SINGAPORE

Abstract

This study uniquely discovers the steady state and general equilibrium dynamics and structure behind the behavior of Singapore's Central Area office sector, specifically in terms of explaining its net space absorption, rent and capitalization (cap) rate. Thus, domestic and foreign investors are enabled to better evaluate their decision-making in commercial real estate investing, particularly in anticipating office rents, capital values, and the risks of investing. This study develops 3 unique and rigorous structural, expectation-augmented and error-corrected stock-flow adjustment models, under the error-coiTection-model approach, for the net office space absorption, rent and cap rate. Model estimation for the office net space absorption achieves a good fit, with the office rental estimation achieving a very good fit, both in conjunction with the appropriate log forms and serial error correction. Inflation volatility is found to be insignificant and excluded while all other causal variables are significant in relation to the cap rate. All the models on the whole 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 all 3 structural models. It is inferred through 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.