Purpose - Shanghai is the most important economic centre in China. It also has the nation's largest modern office market in terms of floorspace and investment values. However, as with office markets in other cities and countries, the Shanghai market displays rental volatility. This paper aims to examine this issue. Design/methodology/approach - Rental volatility is examined by econometrically constructing a long-run equilibrium relationship between rent and underlying demand and supply side factors. In order to establish the validity of this model, it is tested for the presence of a cointegrating vector. From this a short-run dynamic adjustment model is constructed. This is an error correction mechanism that links the short- and long-run models. The impact of office vacancies, foreign direct investment, and changes in the real interest rate on the office market are explicitly considered. Findings - The results indicate that both demand (as represented by gross domestic product (GDP)) and supply (stock) are significant determinants of rents. Space demand is found to be both price and income elastic. In the short-run model the error correction term is significant and correctly signed. In comparison to other office markets, the Shanghai market adjusts rather slowly. Foreign direct investment is found to have a positive impact on long-run rents and the vacancy rate is found to impact on short-term rental adjustment. Originality/value - The Shanghai office market is the most important in China. However, it has displayed significant rental volatility. This paper is the first to examine explicitly the rental adjustment process in this office market. The results suggest a market that is performing as expected by economic theory but which nevertheless displays relatively slow adjustment to market imbalances. © Emerald Group Publishing Limited.
- Office buildings