An urban growth model of office property development

Abstract

Purpose– The purpose of this study is to estimate an empirical model for new office space development starts, based on the theoretical treatment of urban growth. The study introduces a new parameter, namely, office space-usage pattern, to the office space development equation and tests whether developers respond to non-price measures in deciding to commence new developments.Design/methodology/approach– The study first introduces a co-integration approach based on an error correction model to test for long-run relations and short-run dynamics of new office space development. A multivariate regression model is then introduced to identify significant determinants that influence office development starts. The study uses annual data over a time span of 30 years.Findings– Estimated results provide strong evidence that the newly introduced parameter exerts a positive impact on new office space development. It suggests that if the average floor space per employee changes by one percentage point, new office development starts would change by 1.5 percentage point, indicating even a marginal change in floor-space usage per employee (SPE) would have a significant impact on new office space development. Empirical estimates also suggest a strong response of office development starts to the lagged land supply and office space stock.Research limitations/implications– The paper raises the concern about the importance of non-price measures of the supply-side of the office market. There is scope to address the research questions using better data sets. It is also possible to model the supply adjustment process more dynamically in an error correction framework.Practical implications– The findings would suggest that non-price measures, such as space-usage pattern, need to be taken into account when planning and estimating future office space needs. This finding provides valuable insight for our current knowledge on factors affecting new office supply.Originality/value– This is the first study to introduce office floor space usage as a determinant of office development starts in an urban growth conceptual framework for the Hong Kong office market.