A study on the determinants of office rent: the cases of world cities

Abstract

Spatial integration and increased connectivity have hugely affected regions and cities across national borders, and real estate assets, including offices, have inevitably felt the effects of global consolidation. Despite the abundance of discussions on the real estate and office markets, research that focusses on this phenomenon has rarely been conducted.Thus, this study aims to reflect the effects of inter-city connectivity on the world's office market and office rents. The spatial scope of the paper is 50 major cities throughout the world, and the time scope is the period 2010-2014. This study is distinctive in that it conducts a comparative study amongst cities worldwide, and tries to discover a previously unidentified determinant of office rents. The basic assumption of the study is that the spatial integration effect, represented by air connectivity, positively affects office rents. Three models have been set up according to aspects of air connectivity: the number of flight seats, the number of flights, and ASKs (available seat kilometres). Formerly established determinants of office rents, vacancy and GDP per capita are also set as independent variables.Panel analysis of the 50 cities resulted in the following: In the case of Europe and North America, which comprise 80 percent of all samples, correlation of rent and air connectivity turned out to be significantly positive in all models. This empirical result satisfies the basic assumption of the study that increased spatial integration significantly affects world office rents on the whole. Asia Pacific samples, however, turned out to have a statistically insignificant correlation between rents and air connectivity. This result suggests that Asia Pacific's regional complexity is not fully reflected in the models, and shows that the study has some limitations with respect to explanatory power.Considering the office market’s importance in both the commercial real estate market and the real estate market as a whole, it is a crucial task to determine factors that affect office rents to properly understand the asset market and predict the market’s future movement. This study acquires significance in this context because it involves considering how connectivity effects may lessen uncertainty in the real estate market and improve efficiency in this market, where illiquidity has long been thought of as one of its feature