Development of an Effective Rent (Lease) Index for the Chicago Cbd

This paper estimates changes in effective rental rates for the period 1985 to 1991 for office space in the Chicago CBD using information from individual leases provided by the Rubloff Company. This is the first study to use detailed lease-level data to estimate a price index for changes in effective rents for a metropolitan area. Effective rents are estimated from the perspective of the property owners and are defined as the annual-equivalent cash flows of the present value of all cash flows that are explicitly identified in the lease contracts including the contract rental rate, graduations in the contract rate, tenant improvements, moving allowances, buyout allowances, expense stops, broker commissions, and any other conditions of the lease that generate specific dollar receipts or expenditures for the owner. A real estate index based on changes in effective rents rather than property values is unaffected by changes in market capitalization rates and therefore provides a measure of changes in the market for space that is independent of changes in the market for capital. The results suggest that effective rents in the Chicago CBD declined almost 50% from 1985 to 1988 and increased only slightly from 1988 to 1991. Asking rents, on the other hand, were fairly constant over the same time interval. The average of the vase (contract) rents from the sample of leases in this study was lower than the average asking rents (as might be expected) and were more volatile through time. Base rents were greater (and had less volatility) than effective rents, however, due to the use of free rent and other concessions which appear to increase when the market weakens and decreases when the market strengthens. As a result, effective rents have much more volatility and provide a more accurate and timely representation of trends in the price of space than either asking rents or contract rents