The office market: a lemon market? A study of the Malmö CBD office market
| DOI | https://doi.org/10.1108/JPIF-12-2014-0073 |
| Pages | 140-155 |
| Date | 02 March 2015 |
| Published date | 02 March 2015 |
| Author | Peter Palm |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
The office market: a lemon
market? A study of the Malmö
CBD office market
Peter Palm
Department of Real Estate Science, Urban Studies, Malmö University,
Malmö, Sweden
Abstract
Purpose –The purpose of this paper is to test whether bad real estate owners drive out good
real estate owners from the online marketplace for offices.
Design/methodology/approach –This research is based on a statistical analysis of
the advertisement of offices in Malmö CBD, collected weekly during a period of one year.
Findings –The hypothesis that the market for advertisement of office properties is a lemons
market cannot be rejected. The result that owners who have appeared in court more than once in the
last two years being more inclined to advertise supports this.
Research limitations/implications –The research in this paper is limited to the Malmö CBD office
market.
Practical implications –It provides an insight in how the online marketplace for offices works
as a marketplace and how quality signals influences advertisement.
Originality/value –This paper is a direct test of Akerlof’s classical lemon model.
Keywords Leasing, Lemon market, Office market, Online advertising,
Quality in real estate management, Quality signalling
Paper type Research paper
1. Introduction
The office market is a competitive market where we can observe market information
asymmetry. In Sweden several independent internet sites for advertising premises
have emerged in recent years. These sites act beneficially for future tenants by
displaying numerous premises for lease. As a result of these initiatives, the cost for
finding premises has decreased dramatically. Today, one can easily screen the market
by browsing one or more of these sites without involving a third party.
The consumer seeks to obtain as much information as possible on a product’s
quality before purchase, for consumers ultimately choose a product because it delivers
a better service at the same or at a lower cost than another. When this information can
be easily accessible and processed by the business partners, it is known as symmetric
information. Asymmetric information is when one party has an information advantage
over the other party, either by superior knowledge of the product or when the one party
is unable to interpret the information due to a lack of experience. Kadefors
and Bröchner (2004) conclude the real estate manager is likely to know more about
a building’s technical characteristics and its quality than the future tenant is.
Information asymmetries arise in property markets when a manager offering
a service holds better information than the party requiring the information. This kind
of situation is known as the “principal-agent problem”within economics of information
(Stiglitz, 2000). Relating the theory of the principal-agent problem to the property
market –in particular, the leasing market –the manager providing the premises is
the agent, and the consumer looking to lease premises is the principal.
Journal of Property Investment &
Finance
Vol. 33 No. 2, 2015
pp. 140-155
©Emerald Group Publishing Limited
1463-578X
DOI 10.1108/JPIF-12-2014-0073
Received 8 December 2014
Revised 8 December 2014
Accepted 11 December 2014
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
140
JPIF
33,2
In a market with symmetric information, price is directly correlated with
quality. If the agent reduces quality, the price would fall. However, in the case of
asymmetric information, principals cannot determine the quality before
delivery. This is especially evident in service delivery, where the quality can be
determined only at a later stage. This gives agents an incentive to lower quality,
for principals will orient themselves towards mean quality. Such behaviour is
called moral hazard, which, in extreme cases, can lead to a general quality
downgrade within a market.
The other market inefficiency is adverse selection, which occurs when the agent’s
quality of service is not verifiable or observable by the principal at the time of
signing the contract. Before contracting, the principal can assess only the average
quality of similar services. If not supplied with measurable information of
the property or services, the principal is prepared to pay only an average price for
average quality. Suppliers of higher quality products are then prevented from
leasing their premises, potentially resulting in a general decline in quality because
the principals will not accept a higher price since they cannot observe the unique
quality of a premises, only the quality in average. In the end, a downward
cycle occurs where the “bad”products tend to drive the “good”products out of the
market. This phenomenon, named by Akerlof (1970) “Market for Lemons”,
is expected to arise in markets where agents are not rewarded for delivering quality
or cannot reveal it to the market and where principals cannot distinguish the
difference in quality.
This paper regards an empirical test of the implications of a market with
asymmetric information in post contractual setting.
George Akerlof (1970) concluded that if the buyer cannot, or it is of high
cost, distinguish quality until after committing to a contract, bad quality products will
drive out good quality products. If we apply this theory to the advertising of office s on
the real estate market, owners delivering inadequate service or who hold a
bad reputation would have to advertise their premises more frequently and for a longer
time period than others. As the qualities of the premises are visible before contract, by
the future tenant, it is the quality of service that is considered.
The aim of this paper is to test whether bad real estate owners drive out good real
estate owners from the online marketplace for offices. The measure of quality chosen
is the occurrence of cases in court (i.e. if or how often they have been sued in the special
court for real estate rentals (Hyresnämnden)). Considerations have been taken
concerning what signals of quality the companies give to the market.
An office tenant would have an idea of an owner or manager’s quality from
past service experiences, but it may be difficult and/or costly for a potential tenant to
predict future service quality –especially from an unknown owner/manager –from
office advertisements and company web sites. If this information asymmetry occurs the
tenants of “lemon”managers, the office would appear on the advertisement web site
more often. This advertisement web site would then become a market for “lemons”,
where there would be an abundance of low-service owners pushing out leasers of good
service owners, as argued above.
This paper is organised as follows. The first section concerns information and
information asymmetry in real estate markets before introducing the lemon model.
The next section provides a description of the office real estate market in Malmö before
a description of the current study is made. The paper ends with a discussion of the
empirical results and the conclusion.
141
A study of
the Malmö
CBD office
market
To continue reading
Request your trial