Spillover Effect of Large Building Construction on Neighborhood Office Rents

Abstract

The impact of newly constructed buildings on local property markets can be explained by tradeoffs between the supply effect, absorbing demand and reducing rents, and the amenity effect, attracting new amenities and increasing rent. While scholars are increasingly discussing the effects of this tradeoff, particularly in the residential market, work on the office market—a major component of urban areas—is scarce. This study aims to identify these tradeoffs in the Tokyo office market using two identification strategies based on an event study plot. The results indicate a strong spillover of supply effects to lower-tier office buildings. However, in suburban areas, new supply was found to decrease rents for medium-sized office buildings while increasing rents for small ones. In all cases, similarly sized office buildings near the new buildings were not significantly affected. These findings suggest that new supply leads to a filtering process and gentrification and, moreover, that these effects depend on location and size. Furthermore, the results suggest that the new Tokyo supply stimulates latent demand. Such an effect may be unique to a market in which vacancies are low and development is thriving. Our findings are important for investors seeking to understand urban dynamics and optimize their portfolios.