LOCAL AND NATIONAL DETERMINANTS OF OFFICE VACANCIES

A model of vacancy rate determination is estimated using over 30 years of data for 20 U.S. office markets. The variances of individual city office vacancy rates are decomposed into common, time-varying componen ts and city-specific fixed effects. City-specific persistence terms ar e also included to allow for lagged adjustment toward equilibrium. Thr ee striking results are obtained. First, we find that the level of equ ilibrium is predominately determined by local, rather than national fa ctors. Second, we find that it is the random shocks causing local devi ations from equilibrium which reflect the integration across markets. Specifically, we find significant contemporaneous correlations of shoc ks across cities. Finally, the results depict a dramatic level of pers istence in all markets. The model is then applied to determine whether the experience of the 1980s represented a structural break in the und erlying office market structure. (C) 1995 Academic Press, Inc.