How does the cycle arise? The following figure shows the causal structure of the market.

The demand for commercial space depends on economic activity. The greater the employment in the region, the more space is needed, and vacancy rates fall. When vacancy rates are low, effective rents start to rise (effective rents are gross rents net of tenants concessions such as moving and remodeling expense). Higher rents lead to some reduction in demand as businesses make do with space per worker, but the elasticity of the negative Demand Response of feedback ( loop B1 ) is low and the response time is long.

On the supply side, rising rents boost the profitability and market values of existing properties. When prices are high and rising, rents and operating profits are high and developers can realize substantial capital gains as well. High profits attract new developers, who find no shortage of financial backers eager to cash in on the boom. Many new projects are started, swelling the supply line of building under development.

After a long delay (2-5 years), the stock of space rises, vacancy rates rise, and rents start to fall, dragging down market values. As profits fall, so does the development rate. The market creates negative loops that attempt to balance demand and supply through price (the negative Supply Response and Speculation loops B2 and B3).