1. Challenge the future Delft University of Technology Office Market Dynamics The Workings of the Amsterdam Office Market Ruud Boots, Philip Koppels and Hilde Remøy Delft University of Technology Real Estate & Housing Municipality of Amsterdam’s Tax Department

2. Office Markets Dynamics 2/21 Introduction A Paradoxical Situation Vacancy rate Face rent

3. Office Markets Dynamics 3/21 Introduction Problem Analysis

4. Office Markets Dynamics 4/21 Rental adjustment equation: R = Real rent V n = normal vacancy rate V a = actual vacancy rate λ = adjustment factor Normal vacancy rate: 5% a 6% Vacancy gap: actual vacancy rate – normal vacancy rate Va > Vn: downwards price pressure Va < Vn: upwards price pressure Va = Vn: equilibrium Introduction Problem Analysis

5. Office Markets Dynamics 5/21 Introduction Possible causes of the paradoxical situation: Segmented market structure: spatial and structural In-transparency and asymmetric information Face rent index ‘Polluted’ vacancy rate Problem Analysis

6. Office Markets Dynamics 6/21 Problem Analysis Segmented Market Structure

7. Office Markets Dynamics 7/21 Problem Analysis In-transparency and Asymmetric Information Vacancy rate Face rent Effective rent

8. Office Markets Dynamics 8/21 Rent Indexes Types of Rent Three types of rent: Face rent Contract rent Effective rent The effective rent level can be defined as the level annuity with the same net present value as the contractual annual cash flows from the lease contract corrected for the provided (initial) lease incentive. Rent index construction methods

9. Office Markets Dynamics 9/21 Why Incentives? 5 10 15 Long-run market rent trend Office rent Years 0 Market rent Lease Incentives Ease lease negotiation Correct for short-term deviations from long run market trend Disclose price information

10. Office Markets Dynamics 10/21 Effective Rent Index Effective Rent Calculation Assumptions: Office leases are CPI indexed Incentives are deducted from the rent payments = NPV

11. Office Markets Dynamics 11/21 Year2002200320042005200620072008200920102011 Real risk-free interest rate2.3%1.9%1.8%1.9%1.7%2.1%2.4%2.3%2.2% Discount rate State bonds (newest 10 year) Corrected for inflation (real discount rate) 5 year average Effective Rent Index Effective Rent Calculation

12. Office Markets Dynamics 12/21 Data Sample Descriptive Statistics Real Contract RentReal Effective RentLFATrans. MeanSt. Dev.MeanSt. Dev.MeanSumNumber 200221688.1521386.45142075,26353 2003200114.73193113.44184981,35144 200414169.4613969.75167070,12142 2005174124.17164121.42122846,65038 2006174107.0215785.5617419053852 2007191101.7617798.101675112,25167 2008199107.5018095.59116856,07548 200915480.4113371.87211067,51532 2010191103.16177103.67150245,06130 2011203169.23164111.34103733,19832

13. Office Markets Dynamics 13/21 DBGA sampleTotalSample YearMeanSumMeanSumCoverage 2002142075,2631945223,710 34% 2003184981,3512204251,261 32% 2004167070,1211813179,505 39% 2005122846,6502342360,706 13% 2006174190,5382371410,227 22% 20071675112,2511882474,323 24% 2008116856,0751915310,195 18% 2009211067,5151408166,115 41% 2010150245,0611840233,637 19% 2011103733,1981873282,874 12% Data Sample Descriptive Statistics

14. Office Markets Dynamics 14/21 Rent Indexes Comparison Contract rent Face rent Effective rent

15. Office Markets Dynamics 15/21 Incentives Percentage Face and Contract Rent Incentive % of contract rent Incentive % of face rent

16. Office Markets Dynamics 16/21 Rental Adjustment Face and Effective Rent Vacancy rate Face rent Effective rent

17. Office Markets Dynamics 17/21 Rental Adjustment Pearson Correlation

18. Office Markets Dynamics 18/21 Rental Adjustments Pearson Correlation Pearson correlations coefficientNo lagLag 1 yearLag 2 yearLag 3 year Real Face RentPearson Correlation.097-.055.208.342 Sig. (2-tailed).790.879.565.334 N10 Real Contract RentPearson Correlation-.287-.367-.205-.119 Sig. (2-tailed).422.297.570.744 N10 Real Effective RentPearson Correlation-.506-0.648-.499-.451 Sig. (2-tailed).136.043.142.191 N10

19. Office Markets Dynamics 19/21 Indicators market dynamics: face rents  accurate picture?! Hedonic pricing studies: from face rents to effective rents a mere change of numbers? Longitudinal studies Cross-sectional studies Conclusions Office Market Dynamics

20. Office Markets Dynamics 20/21 Further research steps: Quality adjusted effective rent index (hedonic pricing study) Segmented structure of the market: spatial and structural Discussion and Reflection Office Market Dynamics

21. Challenge the future Delft University of Technology Questions? Municipality of Amsterdam’s Tax Department