The Nature of Office Market Heterogeneity: Empirical Evidence and Implications for Market Forecasting

It has long been a theme of real estate professionals that real estate markets are economically fragmented. These markets are presumed to be characterized by product differentiation, by small and isolated sub-pools of participants, and by market segmentation. This view is intuitively compelling, but sobering. It taints the prospects for modern econometric forecasting of office markets because econometric models presume a high degree of market integration. A dilemma results because real estate, being an extremely durable capital asset, tends to have very dynamic market behavior, with wide-swinging cycles, the quintessential concern of econometric modeling. This dilemma is hyperbolized in the case of office markets where both market segmentation and cyclical behavior may be present in the extreme.