Owner Tenancy as Credible Commitment under Uncertainty

John Glascock, C. F. Sirmans and Geoffrey K. Turnbull

Real Estate Economics, 1993, vol. 21, issue 1, 69-82

Abstract: How do landlords provide credible signals to tenants that they will maintainthe building when the needed upkeep over the contract period is uncertain at the time that rental decisions are made? In this paper, we develop a model of credible commitment under uncertainty wherein owner tenancy serves as the commitment signal to the market. In comparing completely tenant‐occupied (absentee landlord) to partially owner‐occupied buildings, the model predicts that in the latter case, the equilibrium rent is higher. We test this prediction using rental data for a sample of office buildings, some of which are completely tenant‐occupied while others are partially owner‐occupied. The results indicate that, as predicted by the model, rents are significantly higher when landlords can signal a commitment to high‐performance standards.

Date: 1993
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