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Forecasting office rental rates: neoclassical support for change.

In this article, the implications of replacement cost changes are examined, including their possible effects on future rent changes in office properties. When currently oversupplied office markets once again attain a state of equilibrium between supply and demand, rents for top-quality office space should, in theory, rise to a level that justifies the cost of new construction. a model based on this assumption is developed, and a market test performed to analyze the model's results.

When real estate prices were driven up by aggressive real estate investment, tight market conditions, strong demand, and abundant capital, the cost approach played a clear role in the valuation process. That role was to balance the estimateds derived from the sales comparison approach and the income capitalization approach. In the simplest terms, if the cost to produce a project was less than its completed value, feasibility was achieved and profit earned.

In the current, ovrsupplied real estate market, however, the emphasis on cost in the valuation of existing income-producing real estate has waned. High vacancies and low rents have produced significant economic (i.e., external) obsolescence that must be deducted from replacement cost new to arrive at a present value estimate. In light of the difficulty of segregating and measuring the varuious forms of obsolescence present in a particular property, the cost approach is usually, and appropriately, accorded least weight upon final reconciliation.

The complete disregard, however, of replacement costs when market conditons are imbalanced is not justifiable. Many ivnestors now equate the success of a property purchase with the spread between acquisition price and the cost of replacement. This implies that cost, at least as a point of reference, has a role in the sales comparison approach. Similarly, the analysis of cost trends also assists in the forecast of future rental rates, which is central to the income capitializaiton approach. This article explores the relationship between replacement costs and future rental rates--specifically office rents.

THE ROLE OF COST IN THE

VALUATION PROCESS

The cost of production actually lies at the foundation of modern real estate value theory. The classical school of real estate thought, which arose during the eighteenth century and early nineteenth century, attributed value to the cost to provide the basic elements of production: labor, capital, coordination, and land. It was the neoclassical school pioneered by Alfred Marshall, however, which formed the basis of contemporary valuation practice. Indeed, it was Marshall, who postulated that market forces tend toward equilibrium at the point at which prices and production costs meet. (1) The theory holds that in a perfect market, price, cost, and value would envetually all be equal. (2) This fundamental economic thory forms the basis of the office-rent forecasting model developed in this analysis.

Marshall and his adherents expanded supply/cost considerations to include the demand-price theory of the marginal utility school. Nonetheless, the basic premise of the cost theory remains infact. No prudent investor will pay more for a property tan the cost to acquire a comparable site and develope it with improvements of equal desirability and utility. Clearly, the principle of substitution is fundamental to this reasoning.

The rapid decline in office construction now occurring throughout the United States supports the credibility of this theory. High vacancies have lowered rental rates to such a degree that in most cases they are insufficient to produce enough net income to justify new construction. With existing properties providing a more economical substitute, investment capital has shifted from development to acquisition. Speculative construction. is quickly declining, and in some--if not mst--markets it has stopped altogether.

LINK BETWEEN

CONSTRUCTION COSTS

AND RENTS

Developers should not construct a property if rent levels do not ensure its economic feasibility. In reality, however, events of the recent past suggest that developers will construct properties when capital is available, regerdless of proven economic feasibility. Over the long term, simple economics dictate that the suply chain, which is composed of lenders (suppliers of capital) and developers (users of capital), will adapt to changes in demand and curtail investment when it is not feasible. Although market activity in the 1980s was a poor example of rational behavior, the conservatism of the current period indicates that the supply chain is recognizing that value is created by product demand rather than by the availability of capital.

If excess is elimiinated from the market, rents should increase to a point that justifies the cost of new constructionwhen market occurpancy reaches a point of stabilization. This is the fundamental concept espoused in Marshall's economic doctrine. In other words, when excess vacancy is no longer present and tenants' options are limited, building owners will have the leverage to increase the price of their product (office space) to a level at which the introduction of new space is again economically feasible. Conversely, comptetition from new buildings (additional product) will prevent rents from rising above this threshold for an extended length of time.

Of course, the term "stabilization" implies achievement of Marshall's ideal of equilibrium between supply and demand. Such a balanced conditon has rarely occurred during the past tow decades because of the relative inefficiency of the supply adjustment mechanism in the real estate markets. Widespread bank failures, however, and the increasingly bearish posture of the financial markets toward real estate investment--specifically new construction--indicate that the goal of market stabilization may be more achievable during the 1990s than at any time in the recent past.

The relationship between construction costs and rents is based on the assumption of rational market behavior. When this quantitative leap of faith is made, hypothetical rental rates can be forecasted by the appropriate model of product cost--including land contribution, gross-to-net income ratios, and an appropriate return to induce investment. When stabilization is attained, the neoclassical theory promulgates the notion that actual rents should match required rents.

While this article is not intended to b used as a specific study for a particular property, the market for office space in the Dallas area offers a case study in forecasting rental rates. The following steps are necesary to build an appropriate model for rental-rate changes, based on the cost-return relationship. (The model will address only the class A/AA office market.)

* Track historic supply, demand, and occupancy conditions;

* Track historic rental rates;

* Quantify historic construction costs;

* Estimate the capitalization rate, net-to-effective gross income ratio, and typical land-to-improvement cost ratio for class

A/AA properties in the Dallas area, on a stabilized basis; and

* Build a case for future rent escalation by forecasting supply and demand conditions, occupancy, and construction costs.

SUPPLY, DEMAND, AND

OCCUPANCY CONDITIONS

Like many other major U.S. metropolitan markets, the Dallas office market experienced dramatic changes during the 1980s, shifting from a period of high occupancies and high rental rates to low occurpancies and depressed rents. Excessive cosntruction combined with declining net obsorption to boost vacancy rates sharply during the middle and latter part of the decade.

Demand for office space in the Dallas area was high during the 1980s, fueled primarily by the creation of jobs in office-intensive industries (e.g., government, services, and finance/insurance/real estate [FIRE]). Employment in these sectors grew by 4.7% annually during the period, resulting in an avergage of approximately 310 square feet of office space absorbed for each job created.

Because the objective of this article is forecast class A/AA rents, it is necessary to isolate this segment of the market from lower classed space. The Swearingen Company, a Dallas-based real estate management firm, provides data on long-term trends of the Dallas office market. The Swearingen Company's definitions of class A and class AA space, while subjective, have remained consistent during the period of analysis. (3) Such space is in professionally managed buildings with good or excellent locations, is capable of attracting high-quality tenants, and has ahigh quality of interior finish.

Figure 1 and Figure 2 illustrate a typical phenomenon in highly competitive office markets. As overbuilding became more extreme and rental rates depressed, tenants in the Dallas market shifted to higher quality space. This quality flight actually lowered the vacancy rate for class A/AA space slightly, despite the fact that vacancy rates for lower classes of space--particularly class D space--rose sharply.

Figure 2 illustrates that at the beginning of the building cycle vacancy rates for lower grade space were significantly less than those of class A/AA space. In addition, tenants were placing greater emphasis on their office space. The vacancy rate spread between lowgrade and high-grade sapce shifted as class A/AA space--19.2%--was well below the 25.8% rate for all combined classes of office space.

The significance of these data is that, as the Dallas office market recovers and increasing rents and declining vacancies drive more price-sensitive tenants back to lower classes of space, a eversal of this pattern should occur. Thus, changes in the forecasts of office space occupancy by class must account for this tenant movement.

RENTAL RATES

In addition to incurring a greater increase in vacancy rates, lower grades of space suffered more severe rent declines than did class A/ AA space during the market downturn. The trend is evident in Figure 3 and Figure 4. It should be noted that the Swearingen Company reports quoted rental rates that are subject to negotiation and therefore do not truly reflect effective rates. Periods of free rent, inordinately high interior finish allowances, and other landlord concessions are not reflected. During 1985, 1986, and 1987, it was quite common for building owners to offer periods of rent abatement--particularly in new, higher-greade properties--which reduced quoted rents by as much as 30%. Thus, the sharp upward trend in rents during those years indicated in Figure 3 is overstated. By 1988, the practice of offering rent abatement was largely replaced by direct rent reductions, narrowing the gap between quoted rates and effective rates. Over the 10-year period as a whole, effective rents in the Dallas area actually declined slightly. By the end of 1990, the weighte-everage quoted rental rate for class A/AA space in the Dallas area was $16.88 per square foot on a full-service basis. With rent abatement largely eliminated as a landlord concession, this average rate is beleived to closely reflect the effective rate at the time of the survey.

REPLACEMENT COSTS

Reproduction cost figures in the Marshall Valluation Services cost guide indicate that in Dallas as of year-end 1990 a 15-story, excellent building of class A construction with elevator and wet sprinkler system cost approximately $127 per square foot to construct. (4) This replacement cost estimate includes high-quality interior finish, but does not include land cost, site work, or entrepreneurial profit. (5)

Based on these comparative historic indices, class A building costs in the Dallas area during the past two decades have reisen approximately 4.9% per year, compounded annually. During the same period, the U.S. consumer price index (CPI) advanced by 6.3% annually, which was indentical to the in rease in the Dallas-Fort Worth area's CPI.

Historically, these data suggest a close correlation between construction costs and general inflationary trends at the national and local levels. Recently, however, overall production costs have advanced more slowly than inflation as the costs for labor and materials have been reduced by decreased demand for new buildings. This divergence between increases in construction costs and inflation became evident in the Dallas area as early as 1983 (see Figure 5) and is now becoming prevalent in the depressed markets of the Southeast, Northeat, and Midwest. Clearly, a relationship exists between real estate market conditions, including rental rates, and production costs.

This relationship was explored in depth in a 1986 monograph published by Salomon Brothers Inc., which outlinhed the movement of production costs and rents in the stages of a typical building cycle. (6) In an undersupplied market rising rents fuel new construction, placing upward pricing pressure on the requisite costs of labor and production. This in turn leads to more rental increases. During building cycles, production costs and rents thus tend to rise at rates greater than inflation rates. However, as an oversupply materializes and reduces demand for new buildings, production costs tend to either decline or rise at a rate slower than inflation, eventually causing rents to adjust downward. As was noted in the monograph, "There is nothing special about this real estate pricing of toehr commodities. In a competitive market, prices are determined by the costs of producing the last unit of supply, and the level of demand determines how many units of supply are produced." (7)

Salomon Brothers' predictions of a reduction in construction cost growth as well as a decline in rental rates at the national level have come to fruition during the past three years. At the national level, the same trend may be expected until demand eventually brings about an improvment in market conditions. In Dallas, however, few new buildings have been constructed in five years and, as previously discussed, this has caused a significant improvement in occupancy rates, particularly for class A/AA space. Further, build-to-suit and public works projects have slowly begun to increase demand for construction labor in the area. The result has been an increase in construction costs during the past three years. (See Figure 5.) The illustration also reveals that increases in construction costs and inflation have tended to correlate over the long term. It is thus reasonable to predict that there will be no lasting reduction in construction (replacement) costs in the Dallas area, and that these costs will actually change at a rate commensurate with inflation as the market moves toward equilibrium.

OTHER CRITERIA

Capitalization rates

Capitalization rates vary constantly according to market conditions and specific property characteristics. In Dallas, entrance capitalization rates for well-occupied class A/AA office building actually have been declining during the market downturn. Investors' expectations of significant increases in near-term rent levels have lowered going-in returns of first years' net incomes. Overall rates based on initial net income of less than 8% have been common. In more stable periods, however, entrance rates were more commensurate with yields on competitive investments.

To quantify trends in capitalization rates, data compiled by the American Council of Life Insurance (ACLI) since the beginning of 1985 and reported in its quarterly publication, Investment Bulletin, have been analyzed. (8) Of the approximately 3,450 loans on office buildings provided by life insurance companies and reported in the bulletin, the mean capitalization rate was approximately 9.2%. The ACLI statistics are particularly useful in this analysis, because the transactions reported typically involve high-grade properties operating at stabilized levels. Obviously, it is true that future financial market conditions hold the potential for change. For purposes of this analysis, however, recent sales of Dallas office buildings as well as the ACLI survey results indicate that entrance rates for stabilized-market transactions that involve newer office buildings support a capitalization rate of approximately 9.25%.

In theory, it is possible to use a required return on cost rather than a market-extracted overall rate, assuming that what is used is applied to the proper cost basis. To clarify, it should be noted that replacement cost, as defined in Marshall Valuation Service, does not include a provision for entrepreneurial profit, commonly referred to as the "developer's fee." The model uses a market-derived overall rate applied to total project costs, including profit. It is thus possible to tie together all three valuation approaches by applying the overall rate estimated from the sales comparison approach as well as the total replacement costs--including land--from the cost approach.

Net-to-effective gross income

ratios

Because the purpsoe of this analysis is to forecast the gross rental rate, it is obviously necessary to convert the required net rent to the corresponding gross rent. Accordingly, both expenses and an allowance for market vacancy msut be added. To estimate gross market rent, the formula is simple: [R. sub. g] = [R.sub.n] + E/1 - [V.sub.cl] where [R.sub.g] = Gross effective rent per square foot of net rentable area (NRA) [R.sub.n] = Required net rental income per square foot of NRA E = Total expenses per square foot of NRA [V.sub.cl] = Market-derived vacancy and credit loss factor, expressed as a percentage

Expenses are derived by analyzing those of newer office buildings in the area. In this model, expenses of $6.00 per square foot of net rentable area (NRA) are considered appropriate. In addition, vacancy and credit loss are estimated through survey techniques, the details of which are discussed more fully in the following section.

Land costs

Prices for prime sites suitable for class A/SS office development have been even more volatile than rents. Minimal demand inrecent years has lowered land values dramatically compared with levels of the previous intensely speculative period. While this cost component has been difficult to predict, historically it has accounted for only about 10% of total construction costs for new high-rise office buildings in major commercial districts in the Dallas area, depending on actual density. This 90:10 cost ratio is implemented in the model.

FORECAST MODEL

ASSUMPTIONS--PHASE 1:

SUPPLY, DEMAND, AND

OCCUPANCY

Before a level of stabilized occupancy can be estimated, basic assumptions must be made regarding supply and demand for class A/AA office space. Further, theory perctaining to what constitutes stabilized occupancy also should be addressed. For the purposes of this article, the model incorporates the following basic assumptions.

* Employment in the FIRE, service, and government sectors will grow by only about 1.9% annually during the next 10 years, compared to 4.7% during the previous decade. Slower population growth and a declining labor participation rate support this logic. Growth will lessen after accelerating during the early 1990s, then increase once again during the latter part of the decade to reflect the business cycle.

* Total net absorption will average 250 square feet of office space for each new job created in these sectors. While this ratio is lower than that established during the past decade (310 square feet absorbed for each job created), it refelcts the probability that tenants will downsize to some degree to economize in a market with rising rents.

* Multitenant space will account for approximately 80% of total net absorption, which is consistent with past trends inthe Dallas area.

* Inventory will increase only moderately as little speculative space is developed and many obsolet buildings are removed from the market. Annual space growth will accelerate during the middle part of the 1990s and peak at 2% annually before correlating with demand in following years.

* The spread between the vacancy rate for class A/AA space and the overall vacncy rate will narrow until a point of stabilization is reached, reflecting the movement of tenants to lower grade space in a rising market. (The focus of this article is not to present a precise forecast of office space absorption in Dallas. Consequently, the conclusions and forecasts with regard to these factors should be used only in the contect of this article.)

The academic literature espouses various theories regarding the relationships between supply, vacancy, and rental rates. The growing consensus is that each local market has a unique "structural" or "natural" vacancy rate. At this rate of vacancy, rental rates are at marginal cost levels. Stated other wise, a level of vacancy exists at which rents are marginally sufficient to justify new construction, after operating expenses are deducted and required returns on new development are satisfied. Extensive empirical evidence shows that real rental rates (adjusted for inflation) fall below the long-run average as th gap between the actual vacancy rate for a local market widens. (9) Conversely, real rents increase at an accelerating rate as the gap narrows. The effects of inflation may cause the movement of actual--or nominal--rental rates to be rapid and dramatic, as past years have shown.

Traditionally, more active office markets in the South, Southwest, and West have had considerably higher structural vacancy rates than less active markets in the East, Northeast, and Midwest. Further, research indicates that structural vacancy rates have been increasing over the long erm for most U.S. office markets, as moe and different types of investors have become actice in the market. (10) The growing conservatism in the financial markets suggests this trend should cease, or even reverse itself, as a lower level of construction reduces the amount of vacant space attributable to new product.

Unfortunately, consistent surveys of vacancy rates in the Dallas office market were unavailable prior to the late 1970s, and it is therefore impossible to calculate a reliable structural vacancy rate. The Swearingen Company's office survey in the area. From 1978 through 1990, a period in which the inventory of space tripled, the Dallas area maintained an average multitenant vacancy rate of approximately 24%. The average vacacy rate for class A/SS buildings, exclusively, was comparable at 25%.

Past experience as well as recent trends in stronger submarkets show that building owners may successfully employ some rent increases when vacancy rates decline below approximately 20%--a point at which large blocks of contiguous construction costs for class A office space increased by 4.9% annually during the past 20 years, a study period that included the high inflation of the late 1970s and early 1980s and the depressed conditions of the past five years. The model requires that costs escalate by an average of 5% annually, reflecting the long-run average and near-term inflationary forecasts.

Future changes in land values are more difficult to estimate. Because land represents a relatively small component of total project cost, however, estimation inaccurancies will have a limited overall impact on the model's results. In the consideration of market cycles, the modle predicts no change in land values through 1991, 15% annual appreciation during the following two years, and 5% annual appreciation thereafter.

With these assmuptions established, it is possible to estimate the effective rental rate required to justify new construction, and with the vacancy and collection allowance set forth, the potential gross market rent required to yield this effective rate. The resulting forecast is illustrated in Table 2. Trends in forecasted and required rents as well as in the vacancy rate, are illustrated in Figure 6.

Rationale and support for

change in nominal rents

As indicated by te forecast output and as supported by empirical data, the spread between the required and forecasted gross rent narrows incrementally with the spread between the structural vacancy rate. This relationship between change in real rents and change in the spread between the zactual and structural vacancy rates has been explored by Torto and Wheaton. (11) Their research concluded that real rents can be expected to decrease 2.3% annually for each percentage point of excess vacancy. Thus, if the structural vacancy rate were 10%, and the actual vacancy rate were 15%, real rents would decrease by approximately 12% per year. If inflationwere averaging 8% annually, nominal rents would decline by 4% per year.

Mechanically, the model correlates the difference between the forecasted and required gross rent in current dollars with the spread in basis points between the structural and forecasted vacancy rates.

[tdo]

space become increasinly scarce. When the rate declines to approximately 12% to 15%, sizable rent increases become common as larger tenants' options are further constrained. Active developers in the market indicate a 10% vacancy rate is perceived as an opportunity for new development. While it is not possible from available data to prove precisely what level represents the structural vacancy rate, it is likely that a 10% overall vacancy rate would inhibit tenant movement sufficiently to allow building owners to raise rents to marginal cost levels. Therefore, this 10% structural vacancy is incorporated into the model.

In light of these assumptions, a forecast of demand, inventory, and vacancy for the Dallas office market until stabilized occupancy is achieved is presented in Table 1, including year-end statistics.

Based on the results of the model, stabilized vacancy for class A/AA office space is predicted in approximately 1996.

FORECAST MODEL

ASSUMPTIONS--PHASE 2:

REPLACEMENT COSTS

AND RENTS

The model assumes a high-quality, highe-rise office building able to attract credict tenants willing to pay, and capable of paying, for the top tier of space in the Dallas market. The basic assumptions of the model are summarized as follows:
Current potential
 market rent per
 square foot of
 net rentable area
 (NRA) $ 16.50
 Current vacancy
 rate 19.15%
 Current expenses
 per square foot
 of NRA $ 6.00
 Total project cost
 (new) per square
 foot of NRA $155.00
 Improvement costs
 contribution 90% ($139.50 per
 square foot
 of NRA)
 Land value
 contribution 10% ($15.50 per
 square foot
 of NRA)
 Stabilized
 capitalization
 rate 9.25%


Tt should be noted that the estimated total construction cost of $155 per square foot includes land (estimated at 10% of total project costs, or $15.50 per square foot) and miscellaneous soft costs and profit estimated at approximately 10% of impropvment costs (translating into approximately $12.70 per square foot). This cost figure, however, does not consider the cost of structural parking, which, in a stabilized market, should provide a separate return on cost.

With these criteria estimated, the two remaining elements necessary are the rates of change in both the cost of improvements and in land values.

As noted in Figure 5, Dallas-area

[tdo]

1997, with inflation running at 5%. Based on the forecast output, real rents increase by 3.2% for each percentage point of excess vacancy. Unfortunately the Torto and Wheaton study consentrates on decreasing rents in declining markets, while our focus is on an improving market. Because the comparative rental-rate bsis is smaller, a change in a positive direction yields a greater relative percentage than the same unit of change in a negative direction. Further, the Torto and Wheaton study, prepared in 1986, now appears conservative when the actual decline in rental rates experienced not only in Dallas, but in most other oversupplied office markets as well, is taken into account. Thus, the conclusions based on the model appear well supported. For the total 10-year projection period, the average annual change in foecasted gross rent is 7.9%. As the subsequent market test illustrates, this long-term change in rents is supported by the expectations of major investors active in the Dallas office market during recent years.

Market test

Fundamentally, the practice of appraising entails simulation of the actions and expectations of prudent and knowledgeable buyers and sellers. To test the validity of the forecast modle output, a number of investors were survyed to determine future rental rate change assumptions used in recent purchases and financial underwriting of major class A/AA office buildings in the Dallas market during the period from 1988 to 1990. The data presented in Table 3 were taken from actual forecasts provided by principals of the purchasing entities or financial institutions involved in each transaction.

These independent forecasts of rental-rate change readily support the theory that as an oversupplied market enters the recovery pahse and approaches equilibrium, rental rates will increase rapidly in some relationship to the return required to justify new competition. (12)

CONCLUSION

Many assumptions are required to drive the rent forecast model, and each may be logically debated. A sizable increase or decrease in demand or supply could alter the conclusions significantly. (Indeed, a retropective view of the market test supports this premise.) Further, these assumptions require that the traditional relationships between vacancy rates for class A/AA space and for other classes of space remain intact.

The tendency for a share of the tenant base to retract to lower grade space in periods of rising rents is also addressed. Should tenants' price sensitivity prove greater than expected in the future, more efficient office-space use or a pronounced shift to lower grade space could result, delaying stabilizaiton of the class A/AA market. Other argumetns against rising construction costs and stabilized required returns could be easily debated ad infinitum. Nonetheless, from a practical appraisal standpoint, the investor survey data suggest that sophisticated market participants regularly employ some variaion of the model developed for this article.

The model is not meant to provide a precise year-to-year forecast of rents. Capitalization rates, net-to-effective gross income ratios, and Currently, the vacanct spread is 9.15 basis points, while the difference between estimated rent and required rent is $6.10 per square foot. Each basis point thus ahs a current value of approximately $.67 per square foot. The model maintains this relationship throughout the forecast period in real dollaors, although the effect of currency inflation (forecast at a 5% annual rate) will increase the niminal value of this dollar increment in the future.

As shown in Figure 6, forecasted gross rent remains somewhat less than required rent, even after forecasted vacancy matches structural vacancy. Rents will continue to lag behind required rents by one year to account for the inherent imprecision in the real estate market's rent-adjustment provess.

According to this rationable, the model redicts that rents will advance by 9.2% annually through product-in-place costs will clearly change with market conditions. No market reaches a magical point at which supply anmd demand are in permanent conjunction, but over the long term the supply/demand relationship should reach equilibrium. The function of the model is to highlight the fallacy of the prediction that rental rates will remain in a depressed state into perpetuity--or simply increase at a rate commensurate with inflationary expectations--in markets that contain sufficient growth to correct oversupply problems. If the concept of market stabilization has any validity (it is certainly a point of conjecture), rental rates for a particular grade of space should reach a level that justifies the cost of construction at some point. To assume otherwise is to assume that the investment market will never behave rationally, a notion that runs counter to principles of neoclassical economics.

Tests that merely correlate rents with vacancies ignore the implications of construction costs as an element of production; in the final analysis, the development arm of the real estate industry cannot permenently supply a product that does not produce a satisfactory return. One real possibility is that tenants may require less opulent space in te face of rising rents. This would lower the overall standard of office space constructed in the future and produce permanent economic obsolescence in the current abundant high-quality products. However, the distinction between tenants' desire for high-grade office space and their capacity to pay for it should be the subject of further analysis.

(1) Alfred Marshall, Principles of Economics, 8th ed. (London, 1920).

(2) American Inst. of Real Estate Appraisers, The Appraisal of Real Estate, 9th ed. (Chicago: American Inst. of Real Estate Appraiser, 1987).

(3) The Swearingen Company, "The Swearingen Report," (biannually 1981 to 1991).

(4) Marshall Valuation Service (Marshall & Swift Publication Company, September 1990).

(5) The construction classification may differ from the leasing classificatin, although in this case they are synonymous.

(6) Mari Cnton and David Shulman, The Impact of Lower Real Construction Costs on the Office Real Estate Market (New York: Salomon Brothers, September 1986).

(7) Ibid.

(8) American Council of Life Insurance, Investment Bulletin (consecutive issues, 1985-1990).

(9) C.W. Wheaton and R.G. Torto, "Vacancy Rates and the Future of Office Rents," AREUEA Journal, (Vol. 16, 1988): 430-436; J. D. Shilling, C. F. Sirmans, and J. B. Corgel, "Price Adjustment Process for Rental Office Space," Journal of Urban Economics (Vol. 22, 1987) 90-100; David Shulman, Rent Projections in the Context of a Rent Cycle, (New York; Sal omon Brothers, October 1986); J. Frew and G. D. Jud, "The Vacancy Rate and Rent Levels in the Commericial Office Market," Journal of Real Estate Research (Vol.3, 1988): 1-8.

(10) Weaton and Torto, 430-436.

(11) Ibid.

(12) With the benefit of hindsight, these forecsts were eoverly optimistic because of a significant, unanticipated decline in absorption in 1990. Consequently, the forecasted annual percentage changes in rents as well as the resultant average annual change ar still considered valid, although displaced by one or two years.

David L. Clark is an appraiser and real estate counselor at Crosson Dannis, Inc., in Dallas, Texas. He received a BA in journalism from the University of Texas at Arlington, and has published articles in The Appraisal Journal as well as numerous other real estate publications. Mr. Clark is a candidate in the Appraisal Institute.

Charles G. Dannis, MAI, is the president of Crosson Dannis, Inc., a full-service real estate and consulting firm in Dallas, Texas. Mr. Dannis received a BBA in management from Southern Methodist University, and has seerved as an adjunct professor of real estate and urban land economics at the Edwin L. Cox School of Business, Southern Methodist University. He has previously published articles in The Appraisal Journal.
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Author:Clark, David L.; Dannis, Charles G.
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Date:Jan 1, 1992
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