LEASING AS A LOTTERY - IMPLICATIONS FOR RATIONAL BUILDING SURGES AND INCREASING VACANCIES

An expanded inventory demand framework is developed that focuses on th e impacts of changes in the local leasing environment. We model the le ase-up process as a lottery in which changes in turnover or absorption affect the probability of winning the leasing lottery. In this contex t, builders rationally respond to transitory, not just permanent, chan ges in the local market. Hence, factors such as temporary shocks to te nant turnover affect the decision to build. The magnitude of turnover- induced cycles can vary across markets depending upon the vintage of t he existing building stock, the local absorption rate and the rent ela sticity of demand for space. This framework, which refocuses attention on the local determinants of the developer's decision to build, hopef ully will prove fruitful in future empirical efforts to explain develo pment and vacancy behavior during the past decade.