We propose a new conceptual framework to calculate the elasticity of office supplies, where the net survival of business physical and economic mismatch are used to define structural and frictional vacant. In addition to the constraints of geography and regulation, We also discover an unobserved aspect of supply elasticity linked to natural blank. Our findings confirm that US Metropolitan Statistical Areas are generally supply inelastic and that searching and matching is a significant factor in the supply dynamics. In markets that are least elastic, investors are more flexible to react to adverse shocks in demand. In the end, we find a decrease in structural vacancy and the subsequent rise in cyclical vacancy due to the slow absorption rate. These findings provide insight into the office market dynamics over the COVID-19 era.

Introduction

A radical change in the character of office space, from the need for individual offices to collaborative spaces, has occurred in the past two decades. On the one hand, major corporations have been pushing for a shared and open workspace and have adopted policies for working from home, which have been in place following the outbreak of pandemics. However, smaller businesses (especially sole traders and joint ventures) have used shared office facilities to maximize networking opportunities provided by the new workspace providers. In addition, a decrease in demand for office space is anticipated when more work on-site tasks are entrusted to employees and the more tedious work is replaced by automation. In the face of these shifts and challenges, the capacity of the supply to adapt to the new demands without limitations and the presence of a short-term mismatch could be used to determine the effect of an adverse demand shock on the price of property.

Supply constraints are usually classified into two major types: physical and regulatory. The first is assessed by the rigor of the process for approval to develop and is typically determined by conducting surveys (Gyourko and others. (2008) 2021, Saks 2008). Regarding the latter, Saiz (2010) introduces an innovative method of analysis that measures the availability of land to resolve the endogeneity issue and determine the degree of tightness of both physical and regulatory limitations on housing supply. The overall constraints are assessed via supply elasticity. This is usually calculated using a growth-based urban economic model.

Based on this classification, the constraints on housing markets could aid in determining the elasticities of supply in office markets. However, the absence of evidence of non-residential markets drives the research focus on the elasticity of office supply within US metropolitan statistical zones (hereafter MSAs), where we find distinct dynamics of market competition and divergent motivations to limit the tightness of supply restrictions that result in a “strategically managed” supply of office space and a large proportion of well-informed investors. When they are in equilibrium, their strategies and the existence of long-term leases with fixed rents influence the ability of the supply to demand changes and hence vacancy since landlords make more money by strategically securing predetermined amounts of space for prominent tenants that can pay greater rents shortly. For more information, refer to the theory of search and match, Wheaton (1990). This happens most often when investors refuse to allow their tenants ‘ requests to sublet–Harvard Business Review (1988)–their strategy can also change between periods of boom and bust. Furthermore, how they deal with space that is worn out influences the response of the supply to market fluctuations.

In this research, we add to urban and real estate economics by examining three ways. First, we develop an understanding framework that is in the search and matching theory (Wheaton 1990) that links physical and economic mismatch with supply elasticity andrium vacancy. A financial mismatch is an event where the current rent rate could be more satisfactory to investors, and a physical mismatch is a worn-out design space that cannot be utilized. In this scenario, two types of mismatches cause structural vacancy. On the other hand, frictional vacancy is usually caused by new firms and failures. In addition to geographical and regulatory constraints, supply elasticity depends on specific features that are not observed and linked to natural vacant.

In addition, in terms of an actual strategy, a new data set can be used to detect the economic gap (i.e., spaces that are accessible for re-letting to prospective tenants rather than existing tenants) as well as to measure the effort required to search (i.e., the relative size of the spaces for letting that is listed) and the prime vs. non-prime rental gap that results from the physical mismatch. We find that the match and search process plays a vital role in determining the elasticities of supply, and the 36 MSAs (covering 44 percent of all of the US people and more than 60 percent of the office work) are supply-inelastic.

The final contribution is to provide an overview of how investors responded by changing the structure of vacancies after the pandemic began. The general rule is that investors decrease the space available in a physical and economic mismatch, reducing structural vacant. In supply inelastic markets, investors are more able to alter their strategies when managing space. However, the more significant reductions in equilibrium vacancy translate to a higher rise in cyclical vacancy instead of absorption into property. In the short term, the dynamic gets amplified. We have seen this by a demand shock triggered by COVID-19. A rapid recovery can be expected in most supply-inelastic markets only if physical characteristics and rent levels are swiftly adjusted to the demand.

In the course of the outbreak, a trend of a “Work From Home” economy has been recognized as a result of The Stanford Institute for Economic Policy Research. In the US, 40% of the workforce worked from home full-time during the pandemic. They comprise more than two-thirds of all economic activities based on GDP, measured by income. According to the Survey of Business, Uncertainty Footnote 1 suggests that approximately 20% of workers work from home after the outbreak. The new economy could last if office owners keep their strategies the same. Social distancing is a critical factor in space management. It is related to matching in our research, including, for instance, individual ventilated cubicles, stopover arrangements of elevators in tall buildings, divisions in the workspace, and regular sterilization of office spaces. If offices are not used, cit centers are degraded, spillover effects are felt on other economic activities like conference and retail, and the consequences of aggregation will diminish. Dark cities may disappear from the capital market. Social impacts could be severe, as isolation for a long time can negatively impact mental health. Office investors could hinder the new economic revolution, and our study provides implicit suggestions for economic recovery in the wake of the pandemic.

The article is organized in the following manner: the next Section reviews the literature, The third Section provides a literature review, and Sect. 3 describes the conceptual framework. In Sect. 4, we discuss our approach to investing empirically and present the results. Sections 5 and 6 contain the principal results, robustness tests, and an overview of investor strategies to combat the coronavirus pandemic. We conclude our conclusions in Section. 7.