Property-Speciic Factors and the Term Structure of Commercial OOce Rents in Central London

Abstract

I explore the effect of latent property characteristics on the estimation of the term structure of lease rates. Using data on Central London office leases, OLS specifications yield estimates of a significantly positive term structure, which is consistent with similar regressions documented in the literature. However, the effect is confounded by heterogeneity at the property level. Aggregating leases without regard to these important property-specific factors results in a spurious term effect. Specifically, the age of the space is shown to correlate not only with the contract rent, but also with the lease term. Long leases in older properties command higher lease rates, consistent with premiums required to compensate landlords for encumbered redevelopment options.