The Concept Of Vacancy and Occupancy Rate

Vacancy Rate is the measurement expressed as a percentage of the total amount of physically vacant space divided by the total amount of existing inventory. Vacant space is defined as space that is not currently occupied by a tenant, regardless of any lease obligation that may be on the space. Vacant space could be space that is either available or not available. For example, sublease space that is currently being paid for by a tenant but not occupied by that tenant, would be considered vacant space. Likewise, space that has been leased but will not be occupied until some date in the future would also be considered vacant space.

 

Vacant space is also only counted in existing or already built buildings. Under construction or proposed space is excluded from the vacancy calculation. Rosen and Smith (1983) defined natural vacancy rate in a manner analogous to the natural unemployment rate as the vacant stock required to facilitate the search needs of tenants looking for office space as well as the search needs of landlords looking for tenants . According to In his study, Chinloy (1996) profits and, as such, it depends on their expectations with respect to office space demand and the marginal cost of holding vacant units.

 

Vacancy rates have been identified by numerous researchers as a key variable linked to rent cycles and building cycles. Wheaton (1987) analysed national office building construction activity and vacancy rates in a post-World War II era and identified a strong relationship between office employment changes and both supply and demand variables and observed that supply responded more quickly than demand during the period. Other empirical studies which have examined the cyclic movement of the commercial property market include Kling and McCue (1987).

 

In their study, Voith and Crone (1988) analysed office market vacancy rates in seventeen large metropolitan areas in the United States for the period, June 1980 through June 1987. They identified clear indications of cyclic vacancy rates and market differences between metropolitan areas, both in cycle frequency and amplitude. Also, they found that the natural (structural) vacancy rate was upward sloping in thirteen metropolitan areas, almost constant in two metropolitan areas and slightly downward sloping in two metropolitan areas during this period, which included two recessions. They concluded that inter-market variations were significant.

 

Wheaton and Torto (1988) examined national office data for the period between 1968 and 1986 and found a clear indication that office vacancy rates and real rents were cyclical. The peaks and troughs of the real rent cycle lagged the trough and peak, respectively, of the vacancy rate cycle by about one year. They suggested that both tenants and office managers apparently recognized the need for real rent adjustments in response to vacancies above and below the structural (natural) vacancy rate. In the United States, the natural vacancy rate was about 7.5% in 1968, but by 1988 it had increased to nearly 12%.

 

Wheaton and Torto (1988) extensively documented evidence of real estate cycles, but cited the failure of existing explanations to provide a satisfactory answer for the boom-and-bust behaviour in real estate markets. The severity of the boom-and-bust cycle has been attributed to developers lagging optimum timing, building too late in the boom, and continuing to build into the bust (Wheaton &Torto, 1988).

 

In their study, Gordon et al. (1996) examined office market volatility in the commercial property market in the United States using office rental data from thirty-one metropolitan areas over the time period 1978 through 1995, and the change in vacancy rate over time as its measure of the real estate cycle. They found that different metro areas behave differently over time and that some office markets have longer cycles or less volatility than others. Their study also focused on identifying economic factors to determine the underlying causes of office market cyclicality. Their analysis suggests that movements in vacancy rates are likely to be affected by different factors at different stages of the cycle.

 

The natural vacancy rate of real estate draws its parallel from the natural unemployment rate in labor markets. In the labor market, 0% unemployment is never optimal due to frictional forces of the labor market. Because job searching requires time, the duration spent searching for a job produces a level of frictional employment in the labor markets. Without vacancies in the labor market, you would have to find someone who occupies the job you want, and also wants the job that you currently have.

 

This concept can be similarly applied to the real estate market when thinking about a natural vacancy level. The theory of a natural vacancy rate in the real estate market asserts that real estate markets in reality is not frictionless, and thus cannot operate at a true equilibrium (where supply equals to demand, thus resulting in zero vacancy). Due to the decentralized nature of real estate markets, it can be highly difficult for a landlord to be matched with the best available tenant. As a landlord, the objective is to find the best tenant who will be willing to pay most for a certain space. Because of this, landlords will anticipatorily set high rents so that not all tenants will be interested in the lease (Krainer, 2001). As such, even in equilibrium we expect there to be vacancies due to the inherent friction present within the market (Wheaton 1988).

 

Knowing the natural vacancy rate of any given market can yield highly useful knowledge for landlord and investors. If the actual vacancy rate is below the natural rate, rents will rise. The excess demand in the market will prompt an increase and rents, subsequently driving vacancy back up to its equilibrium level. Conversely, when the actual vacancy rate is above the natural level, prices will go down as due to the excess supply in the market. Thus, the natural rate is along run equilibrium determined by structure of the economy. The natural vacancy rate can then be defined as the equilibrium level of vacancy where there is no pressure to either increase or decrease rents. Beyond knowing the direction of future pricing, knowing the natural vacancy rate of a rental property will also help guide investment decisions. In the long run, investing in a market where the natural vacancy is low or declining will yield a higher return on investment than otherwise, ceteris paribus.

THE EFFECT OF EXCHANGE RATE FLUCTUATION ON THE NIGERIA ECONOMY

THE EFFECT OF EXCHANGE RATE FLUCTUATION ON THE NIGERIA ECONOMY

ABSTRACT

This research work is centered on examining effect of exchange rate fluctuation on the Nigeria’s economic growth from 2007 to 2018. The specific objectives of the study is to determine the effects of exchange rate fluctuation on the Nigeria economy, evaluate the effects of interest rate on economic growth in Nigeria and examine the effects of inflation rate on economic growth in Nigeria. The main type of data used in this study is secondary; sourced from Central Bank of Nigeria Statistical Bulletin of various issues. The regression analysis was used to analyze the data. The result revealed that exchange rate fluctuation has significant effects on Nigeria economic growth and development, interest rate has no significant effects on Nigeria’s economic growth (GDP) and inflation rate has no significant effects on Nigeria’s economic growth (GDP). Therefore, the study recommended that the effort of the government should be geared towards maintaining a stable and sustainable exchange rate, since the stability of these could enhance industrial output. There should be an increase in the exchange rate of Naira in order to enhance economic growth, Interest rate should be at a minimum, in order for the purchasing power of an average Nigeria to increase. And that the government should encourage domestic production and consumption of goods and services and necessary policies in place to improve the value of Nigerian currency so as to reduce inflation.

CHAPTER ONE

1.0     INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The exchange rate is perhaps one of the most widely discussed topic in Nigeria today. This is not surprising given it’s macro-economic importance especially in a highly import dependent economy as Nigeria (Olisadebe, 2015). Macroeconomic policy formulation is a process by which the agencies responsible for the conduct of economic policies manipulate a set of instrumental variables in order to achieve some desire objectives. In Nigeria these objectives include achievements of domestic price stability, balance of payment equilibrium, efficiency, equitable distribution of income and economic growth and development.

Exchange rate policy involves choosing where foreign transaction will take place (Oladipupo,  & Onotaniyohuwo, 2016). Exchange rate policy is therefore a component of macroeconomic management policies the monetary authorities in any given economy uses to achieve internal balance in medium term. Specifically internal balance means the level of economic activity that is consistent with the satisfactory control of inflation. On the contrary, external or sustainable current account deficit financed on lasting basis expected capital inflow. Exchange rate is the price of one country’s currency expressed in terms of some other currency. It determines the relative prices of domestic and foreign goods, as well as the strength of external sector participation in the international trade (Obadan, 2016). Exchange rate regime and interest rate remain important issues of discourse in the International finance as well as in developing nations, with more economies embracing trade liberalization as a requisite for economic growth (Obansa, Okoroafor, Aluko and Millicent, 2013).

In Nigeria, exchange rate has changed within the time frame from regulated to deregulated regimes. Ewa, (2011) agreed that the exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era and when agricultural products accounted for more than 70% of the nation’s Gross Domestic Products (GDP). In 1986 when Federal government adopted Structural Adjustment Policy (SAP) the country moved from a peg regime to a flexible exchange rate regime where exchange rate is left completely to be determined by market forces but rather the prevailing system is the managed float whereby monetary authorities intervene periodically in the foreign exchange market in order to attain some strategic objectives (Mordi, 2006).

The key element of structural adjustment programme (SAP) was the free market determination of the naira exchange rate through an auction system. This was the beginning of the unstable exchange rate; the government had to establish the foreign exchange market (FEM) to stabilize the exchange rate depending on the state of balance of payments, the rate of inflation, Domestic liquidity and employment. Between 1986 and 2018, the federal Government experimented with different exchange rate policies without the any of them to make a remarkable effects in the economy before it was changed. For instance from 1982 – 1983, the Nigerian currency was pegged to the British pound sterling on a 1.1 ration. Before then, the Nigerian naira has been devalued by 10% and also between 2015 to 2018 the Central Bank of Nigeria fixed the Nigeria Naira at between N300 to N350 against one dollar ($1) (CBN, 2015). Apart from this policy measures, the Central Bank of Nigeria (CBN) applied the basket of currencies approach as the guide in determining the exchange rate which was determined by the relative strength of the currencies of the country’s trading partner and the volume of trade with such countries. Specifically weights were attached to these countries with the American dollars and British pound sterling on the exchange rate mechanism (CBN, 2016). One of the objectives of the various macro–economic policies adopted under the Structural Adjustment Programme (SAP) in July, 1986 was to establish a realistic and sustainable exchange rate for the Naira; this policy was recommended in 1986 by the International Monetary Fund (IMF). On exchange mechanism and was adopted in 1986. This inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate (Gbosi, 2014). It is against this background that this study seeks to examine the effects of exchange rate fluctuation on the Nigeria economy.

1.2     STATEMENT OF THE PROBLEM

Exchange rate fluctuation is generally considered undesirable in any economy because of its perceived effects on the economy. The fluctuation of exchange rate in Nigeria therefore, raises an important research and policy problem on its effects on the economy. The use of exchange rate to stimulate economic growth is as old as the history of international trade. For instance, extensive literature has documented different exchange rate regimes adopted by countries, in order to stimulate economic growth. Exchange rate volatility might strongly affect the growth performance of open economies through the trade channels on the short-run (IMF 2014, European Commission 1990). From a long-term perspective, fluctuations in the exchange rate level constitute a risk for growth in emerging markets economies as they affect the balance sheets of banks and enterprises where foreign debt tends to be denominated in foreign currency (Eichengreen and Hausmann, 2015). That is, exchange rate fluctuation inflates the liabilities in terms of domestic currency thereby increasing the probability of default and crisis.  Thus, it has become imperative to empirically establish the effects of exchange rate fluctuation on the Nigerian economy. Relying on past empirical evidence on this subject matter given so recent developments in the economy might be misleading. It is against this problem that this study seeks to examine the effects of exchange rate fluctuation on the Nigeria economy.

1.3     OBJECTIVE OF THE STUDY

The objective of the study is to examine the effects of exchange rate fluctuation on Nigeria economy. The specific objectives of the study include:

1. To determine the effects of exchange rate fluctuation on the Nigeria economy.
2. To evaluate the effects of interest rate on economic growth in Nigeria.
3. To examine the effects of inflation rate on economic growth in Nigeria.

1.4     RESEARCH QUESTIONS

The researcher seeks to find the answer to the following three questions:

1. Does exchange rate fluctuation in Nigeria have any significant effects on economic growth?
2. Is there any significant relationship between interest rate and Nigeria’s economic growth?
3. Does inflation rate have any significant effects on Nigeria’s economic growth?

1.5     RESEARCH HYPOTHESES

Based on the objectives of the study, the following hypotheses were formulated.

H_o1: Exchange rate fluctuation has no significant effects on Nigeria economic growth and development.

H₀₂: Interest rate has no significant effects on Nigeria’s economic growth (GDP).

H₀₃: Inflation rate has no significant effects on Nigeria’s economic growth (GDP).

1.6     SIGNIFICANCE OF THE STUDY        

The significance of this research work lies in the fact that if the cause of the unstable exchange rate of the naira is identified and corrected, the economy will rapidly grow and develop into an advance one. This is so because if the unstable exchange rate of naira is proved to be affecting the macro- economy major variables badly, including Real exchange rate, Real interest rate, inflation rate, gross domestic product and trade openess of the country, attempts should be made to stabilize the exchange rate. This is because these variables are gauge for the measurement of growth and development of any economy.

Importantly, this study would help the government and the central bank of Nigeria (CBN) to identify the strength and weakness of each foreign exchange system and hence adopt the policy that suits the economy best. This will definitely enhance growth and development of the economy, the study will also serve as a guide to future researchers on this subject.

1.7     SCOPE OF THE STUDY

This research work is designed to examine of the effects of exchange rate fluctuation on the Nigeria economy between 2001-2018 a period of seventeen years. The scope consist of the regulatory and deregulatory exchange rate period i.e. the fixed exchange rate and the floating exchange rate period. The main type of data used in this study is secondary; sourced from Central Bank of Nigeria Statistical Bulletin of various issues. The study is further limited to the following variables used in the models; dependent variable – Gross Domestic Products (GDP) while the independent variables are Exchange Rate (ENRT); Interest Rate (INRT) and Inflation Rate (INFRT) for the period 2001 – 2018.

1.8     DEFINITION OF TERMS

Gross Domestic Product (GDP): Gross Domestic Product is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

Foreign exchange: Foreign exchange is a means of payment for international transaction; it is made up of currencies of other countries that are freely acceptable in settling international transactions.

Exchange control: This is a foreign exchange arrangement in which the government purchase all coming foreign exchange and is the only source from which foreign exchange can be purchased legally.

Exchange rate: An exchange rate is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another currency.

Interest rate: An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed (called the principal sum)

Inflation rate: inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.