Supply Constraints and Search Equilibrium in Office Markets

Gianluca Marcato () and Lok Man Michelle Tong ()
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Gianluca Marcato: University of Reading
Lok Man Michelle Tong: University of Reading

The Journal of Real Estate Finance and Economics, 2025, vol. 70, issue 2, No 7, 378-428

Abstract: Abstract We present a new conceptual framework to estimate office supply elasticity, where net business survival, physical and economic mismatch are used to identify frictional and structural vacancy. Alongside regulatory and geographical constraints, we also find an unobserved feature of supply elasticity linked to natural vacancy. Our results confirm that US Metropolitan Statistical Areas are generally supply inelastic and the search and matching process plays a key role in supply dynamics. In the least inelastic markets, investors tend to be more flexible to respond to negative demand shocks. As a result, we observe a reduction in structural vacancy and a subsequent increase in cyclical vacancy given the slow short-term movement in absorption. These findings also shed light upon office market dynamics during the COVID-19 period.

Keywords: Supply elasticity and Constraints; Structural Vacancy; Frictional Vacancy; Commercial Real Estate; Search Equilibrium; COVID-19 (search for similar items in EconPapers)
JEL-codes: R14 R33 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11146-023-09955-y

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