The impact of firm size and industrial diversity on office market volatility

Abstract

ABSTRACTThis study examines the relationship between regional economic characteristics and the volatility of metropolitan office markets. Although the concept of diversity has often been adopted to illustrate the urban economy since Jane Jacobs (1961, The death and life of great American cities. New York, NY: Random House), only a few previous studies investigated the impacts of diversity on the metropolitan office market. Therefore, this paper has tried to fill this gap. In addition to the influence of industrial diversity, firm size diversity is explored because different firm sizes may show dissimilar response patterns to an economic shock, have different levels of risk premiums that landlords are willing to pay, and have different preferred spatial characteristics. The results from a panel data analysis suggest that office rent volatility decreases as the firm size diversity increases compared to the previous year. For industrial diversity, office market volatility decreases as industrial diversity increases. In addition, further analysis reveals that the impact of diversity on metropolitan office market volatility can vary by market size. Results of empirical analysis imply that a sufficient number of firms with diverse functions and greater business diversity are a desirable condition for reducing fluctuations in office markets.