Office Market Research Articles

The Impact of Carbon Emission Reducing Design Features on Office Occupiers’ Choice of Premises

Energy saving measures, if incorporated into existing and new buildings, can help the UK to achieve its ambitious goal to reduce carbon emissions by 80 per cent by 2050. Yet, the penetration of such technologies has been slow in the commercial real estate market. This paper examines the attitudes and preferences of office end users and their acceptance of carbon emission reducing technologies. It employs conjoint analysis to model the real estate decision-making of 150 respondents who claimed to have an input into their organisation’s choice of premises. The findings demonstrate that functionality and accessibility remain top priorities in occupiers’ choice of premises. Lower rents, improved corporate image and productivity are revealed as attributes that could compensate occupiers for energy-efficient attributes that restrict control over internal environment and operation of equipment. The paper discusses instruments to promote greater acceptance and penetration of carbon emission reducing design features in the office market.

Office Price Index for Derivative Using S&P/Case-Shiller Estimator

People are starting to doubt business recovery in office market after global financial crisis in 2008. And most institutional and individual portfolios are undiversified in real estate : incurring enormous transaction costs than other financial products. Especially office market has more risks than other real estate market for high transaction costs and many related industries. Although this stuff can lead to increase the risk of investment in office market, nor are there markets that would allow individuals and institutions to hedge their risks. The establishment of office price index future and option markets is likely to hedge away large risk in office market, and provides lowering transaction costs for trading in real estate. We estimate Office Price Index using S&P/Case-Shiller repeat sale estimator which is proposed by Robert. J. Shiller in 1991. The estimator is a sort of Feasible Generalized Two Stage Least Squares, which compute Value weighted Arithmetic Price Index.

Commercial Property Rent Dynamics in U.S. Metropolitan Areas: An Examination of Office, Industrial, Flex and Retail Space

This paper is concerned with the market rental rate for space offered by commercial property and how that rental rate evolves over time. Rental rates reflect the value of the services provided by the property and can have a significant impact on the ability of its owners to make monthly debt obligations. We investigate commercial property rent dynamics for 34 large metropolitan areas in the U.S. The dynamics are studied from the second quarter of 1990 through the second quarter of 2009 and the results are compared across four property types or uses (office, industrial, flex, and retail). There is substantial heterogeneity in both the long and short run responses to changing demand and supply conditions. In general, the office market is the slowest to adjust back towards equilibrium while industrial and flex markets adjust back to the long run equilibrium very quickly. For industrial and office types, the speed of adjustment is substantially faster within quality segments and is strongest for grade A properties.

The dynamic correlation and volatility of real estate price and rental: an application of MSV model

This article investigates the dynamic conditional correlation between price and rental among four types of real estate markets, namely housing, retail, office and factory. In the case of Hong Kong (from January 1993 to December 2008), the Dynamic Conditional Correlation Multivariate Stochastic Volatility (DCC–MSV) model and Bayesian Markov Chain Monte Carlo (MCMC) are employed to capture the volatility and time varying correlation of property price and rental in each market. The empirical results demonstrate that the volatilities of price are significantly larger than those of rental for each type of real estate markets throughout the whole sample period. Besides, the findings indicate that the correlations between price and rental are time-varying, and the average correlation in the housing market is much larger than those in the other three markets. Also, the conditional correlations in the factory market are the most volatile, while those in the office market are relatively stable. Additionally, two particularly volatile periods have been identified in and around 1997 and 2003.

The role of corporate reputation and employees' values in the uptake of energy efficiency in office buildings

Although office market actors in the United Kingdom show a growing interest in energy efficiency, the pace of takeup of energy efficient office features is slow. Previous studies have highlighted the roles of limited direct financial costs and benefits (‘efficiency gaps’) and market barriers in limiting the rate of technology adoption. This study provides further evidence on the importance of these factors, but the primary contribution is focused on the role of corporate reputation and on the importance of individuals' values in shaping corporate behaviour. The paper presents a theoretical framework to explain environmental decision making in firms and we present qualitative evidence drawing from sixteen semi-structured individual and group interviews with office market stakeholders in London, Glasgow and Edinburgh. The research finds that companies, despite gradually becoming more energy conscious, still regard energy costs as a negligible part of their business costs. Nevertheless, an increasingly important driver is the reputational gain obtained by corporate businesses implementing sustainable practices. All the interviewees agreed that the pace of change in the office market is slow and that only further policy interventions will accelerate it.

Formación de la ciudad global, economía inmobiliaria y transnacionalización de espacios urbanos: El caso de Ciudad de México

Since the 1990s, the office market in Mexico City has been fundamentally transformed. The available office space doubled since 1997 to 6.9 mill.m², with the first class segment capturing 80% of the construction activity. In addition, the geography of the office market has been altered, because new centers of property development have been created in the Western parts of the city. The paper goes on to argue that the transformation of the office market is basically driven by processes of global city formation, because ever more global corporations have a (regional) headquarter in Mexico City, what has caused a sharp increase in the demand for first class office spaces. In the second part of the paper it is maintained that the transformation of the office market and of urban spaces in Mexico City are best understood as transnationalization. Taking the Torre Mayor as a case study it is shown that the new global city spaces are produced and used principally by actors without a clear national identity. In addition, they have been built according to new mechanisms of planning (Strategic Planning), which correspond to a new global standard. Accordingly, it is sustained that the rules of urban planning and management are becoming denationalized, too.

Perspektiven des deutschen Immobilienmarktes und wirtschaftspolitische Herausforderungen

AbstractThe current population forecasts bode ill for “the” real estate market in Germany: The regionally differing decreases in population will affect both the office and residential real estate market, however, not to the same extent. A reduction of property values with impacts on the economic activity and growth may follow. Due to potentially more restrictive technical requirements in order to slow down climate change investment losses in the real estate business could even be increased if no stronger international demand for property on the German real estate market can be generated through a higher level of transparency. An improved family policy, more incentives for internationals to migrate to Germany (which is where universities could play a significant role) as well as programs for the maintenance of existing facilities and their energy-efficient upgrading could be essential elements within a strategy for real estates.

Flight to quality?

Purpose – The purpose of this paper is to investigate the effect of the crisis on the pricing of asset quality attributes. This paper uses sales transaction data to examine whether flight from risk phenomena took place in the US office market during the financial crisis of 2007-2009. Design/methodology/approach – Hedonic regression procedures are used to test the hypothesis that the spread between the pricing of low-quality and high-quality characteristics increased during the crisis period compared to the pre-crisis period. Findings – The results of the hedonic regression models suggest that the price spread between Class A and other properties grew significantly during the downturn. Research limitations/implications – Our results are consistent with the hypothesis of an increased price spread following a market downturn between Class A and non-Class A offices. The evidence suggests that the relationships between the returns on Class A and non-Class A assets changed during the period of market stress or crisis. Practical implications – These findings have implications for real estate portfolio construction. If regime switches can be predicted and/or responded to rapidly, portfolios may be rebalanced. In crisis periods, portfolios might be reweighted towards Class A properties and in positive market periods, the reweighting would be towards non-Class A assets. Social implications – The global financial crisis has demonstrated that real estate markets play a crucial role in modern economies and that negative developments in these markets have the potential to spillover and create contagion for the larger economy, thereby affecting jobs, incomes and ultimately people’s livelihoods. Originality/value – This is one of the first studies that address the flight to quality phenomenon in commercial real estate markets during periods of financial crisis and market turmoil.

Flight to Quality? An Investigation of Changing Price Spreads in Commercial Real Estate Markets

This paper uses sales transaction data in order to examine whether flight from risk phenomena took place in the US office market during the financial crisis of 2007-2009. The effect of the crisis on the pricing of asset quality attributes, mainly summarized by the class category of each building, is investigated. In addition, the paper examines how turnover levels were affected by the market downturn and whether there were significant variations between different real estate quality types. The results of the hedonic regression models suggest that the price spread between Class, A and B or C grew significantly during the downturn. We also find that property attributes such as size, height and age are priced significantly differently during upturns and downturns of the market.

Effect of "Green" (LEED and ENERGY STAR) Designation on Prices/sf and Transaction Frequency: The Chicago Office Market

Executive Summary. This is an empirical study of theeconomics of green (LEED and ENERGY STAR) designationamong all downtown Chicago office transactionsspanning 12 years. Green properties achieve on-averagehigher occupancies and prices / sf compared to non-greenproperties. The hedonic, repeat-sale, and transaction frequencymodels applied provide evidence of the price"bubble" in 2006–07 and the importance of green designation.LEED properties sold for a 23% price / sf premium,while an ENERGY STAR designation had no effect.Also, LEED Class A properties transacted 68% lessthan non-LEED, while ENERGY STAR Class B propertiestransacted 23% more than non-ENERGY STAR.These findings are consistent with the hypothesis thatsignificant capital expenditures for achieving a greenerproperty require longer cost recovery holding periods.

Rational Expectations? A Time-Series Analysis of Building Booms in the London Office Market

Expectations of future market conditions are generally acknowledged to be crucial for the development decision and hence for shaping the built environment but there appears to be no consensus in the literature on what exactly constitutes rational behaviour of individual developers. This paper outlines the rationality conundrum that developers face when trying to anticipate their competitors’ knowledge and behaviour. Keeping in mind these limitations, we then test empirically for evidence of rational versus adaptive and naive expectations in the Central London office market from 1987 to 2009. Applying VAR models and a recursive OLS regression with one-step forecasts, we do not find evidence of adaptive and naive expectations of developers. Although the magnitude of the errors and the length of time lags between market signal and construction starts vary over time and development cycles, our results confirm that developer decisions are explained to a large extent by contemporaneous and historic conditions in both the City and the West End but this is more likely to stem from the lengthy design, financing and planning permission processes rather than adaptive or naive expectations.

The value of rental deposits

PurposeThis paper has two aims: to consider the negotiating strength of landlords and tenants in lease negotiations; and to calculate the level of deposit which is necessary to mitigate income risk.Design/methodology/approachThe paper reviews the existing literature on the negotiation strength between landlords and tenants in different stages of the property cycle; investigates the well established deposit system in South Korea for lessons that might be applied in the UK; estimates the appropriate level of deposit using simulation methodology, given different states of the market; and places the contractual arrangement in a legal framework.FindingsEvidence from the Seoul office market suggests that deposits can be very effective in protecting income return. In the UK during the down phase of the cycle, when supply of space exceeds demand and business conditions are uncertain, tenants are unwilling to pay deposits and landlords are more inclined to offer incentives in a bid to get the property let, even though the down phase is exactly the time when a deposit system is needed most. Landlords should be looking through the cycle and insisting that deposits are paid at the height of the market when their bargaining strength is stronger. The deposit should be sufficient to cover the probability of income loss in the down phase of the cycle. Based on market evidence in 2009, the amount of the deposit should be equal to at least 15 months rent.Practical implicationsThe stability of the income return is one of the key features of real estate both as an investment and as security. The use of rental deposits is a practical and straightforward way of hedging the risk. The paper estimates the amount of deposit required and provides guidance on the key heads of terms, which should be included in a deposit agreement.Originality/valueThe estimation of rental deposits has very little coverage in the literature. At a time when income return is under pressure landlords need to be fully aware of the benefits of the deposit system and the key factors that need to be considered when estimating the amount of deposit necessary to offset tenant default risk.

Sinking funds within the service charge in the UK office market

PurposeThe paper aims to examine how to create a sinking fund, the legalities of its creation and ownership, taxation issues and the accounting treatment of tenant contributions towards sinking funds within service charges demands in the UK office sector.Design/methodology/approachThe paper reviews the prescriptive guidance that the 2007 RICS Code of Practice makes in terms of the creation and operation of such funds, and concludes within an empirical investigation of industry practice on sinking funds from 2004‐2008.FindingsThe paper reports whether the Code has improved practice, disclosure, communication and transparency in terms of such funds and speculates on how a future Code might further improve on existing management.Originality/valueThe data are original, and findings conclusively prove the need for enforcement of the existing Code, and necessary revisions as well.

Urban planning in office markets: A methodological approach

This article stresses the importance of urban planning interventions on real estate office markets in an environment increasingly characterized by globalization processes and progress of information and communication technologies, leaving behind the traditional influence of more market-related variables spread abroad vast literature. It contends that a better indirect control exerted by municipal authorities may launch the performance and characteristics of these markets. Within this scope, an innovative methodology and model are proposed, aimed at assisting municipal decisions in the definition of strategic policies concerning location or relocation of offices, and respective influences over rents. This methodology and this model have a flexible ongoing character that fits the anytime concrete features of local office markets. They are applied, as a case study, to the office market of Oporto city (Portugal). Implications for urban policy are inferred and generalized from this analysis.

Valuation accuracy and spatial variations in the efficiency of the property market

PurposeThe purpose of this paper is to address the variation of efficiency of local office markets. It has long been argued that as data in the property market are based on valuations, it has a tendency toward smoothing or stickiness. The accuracy of valuations is shown to be partially dependent on local variable factors such as the extent of information, the variability of local cycles and the heterogeneity of the stock. This paper assesses the efficiency of local office markets in nine cities of the UK by estimating unsmoothed annual time series of rents and returns and comparing with the original valuations.Design/methodology/approachThe paper uses an econometric approach to identify true unobserved returns from observed smoothed data. It uses desmoothing techniques and compares the volatility of smoothed and desmoothed underlying returns. It then looks for autocorrelation over time in the errors where the presence of autocorrelation rejects the assumption of market efficiency.FindingsExamining, regional city office markets, the results suggest that financial centres have the least efficient markets because of their high level of variability. Other provincial cities are characterised by weak‐form efficiency. Market cyclicality is found to be a key factor affecting valuation accuracy.Research limitations/implicationsResearch in regional markets is often constrained by shortness and low frequency of time series observations. This limits the analysis and the ways in which it could be developed. Issues also relate to the method of desmoothing adopted.Practical implicationsKey financial centre are found to be less efficient markets than other cities. Thus, price changes fully embody all previous information in regional centres but not in London or Edinburgh. Periods of significant cyclical volatility tend to cause valuation inaccuracy and pricing problems.Social implicationsThere are spillovers from inefficiencies in property market pricing that can affect other sectors of society directly (through increased costs) or indirectly (by contributing to macroeconomic cyclicality).Originality/valueThis is the first paper to explicitly consider the efficiency of regional city office markets and to identify the true unobserved returns series in each city office market. Its findings, perhaps unexpectedly, suggest that most regional city office markets are more efficient at processing pricing information than London.

Supply elasticities and developers' expectations: a study of European office markets

PurposeThe purpose of this paper is to investigate the relationships between supply and demand in 19 European office markets in the period 1991‐2006. It estimates the variations in the price elasticity of supply across the different markets. The paper tests whether developers display evidence of myopic or rational expectations in their behaviour.Design/methodology/approachThe paper draws upon a time series of rental, take‐up and new completions for 20 European office markets. A static measurement of price elasticity is calculated for each office market. To measure this expected supply response in the empirical analysis, the paper applies an impulse response analysis.FindingsThere is an evidence of positive and negative price elasticity. In a significant proportion of cities, supply increases following falls in rental levels. As a result, there is some evidence of myopic behaviour in a proportion of the markets examined, there is little evidence to support the hypothesis that real estate developers systematically display myopic expectations. The diversity in developer responses to price signals is surprising. It is concluded that idiosyncratic rather than systematic factors may dominate supply‐side responses to market signals.Research limitations/implicationsThis paper is essentially exploratory and raises a number of questions for further investigation. There is scope to address the research questions using better data series, in particular, net absorption rates, construction starts, real rental growth rates and different geographical definitions. There is also scope to extend the research to examine the causal factors underlying differences in supply elasticity, for instance, the relative contribution of constraining variables such regulatory restrictions and limitations in physical capacity. It is also possible to model the supply adjustment process more dynamically in an error‐correction framework.Practical implicationsThe findings would suggest that the complexity and diversity of economic, institutional and capital market influences affecting European commercial real estate markets seem to be far too numerous for any single model of market or developer behaviour to explain.Originality/valueThis is the first paper to examine supply elasticity across a broad range of European office markets.

Disentangling the Short and Long-Run Effects of Occupied Stock in the Rental Adjustment Process

In the current stand of literature on the rental adjustment process starting with Hendershott et al. (Real Estate Economics, 30, 165-183, 2002a, Journal of Real Estate Finance and Economics, 24, 59-87, 2002b) it has become practice to treat the compound variable “occupied stock” as a supply variable. In this study we show that this variable deserves a more critical investigation and that the general view of a supply variable may be misleading. Using panel data covering 30 urban areas for 17 years, we investigate the rental adjustment process in the German office market. The application of recently developed cointegration techniques for non-stationary panel data in conjunction with the corresponding error correction model (ECM) enables us to overcome the data limitations, particularly existent for most European real estate markets. Hence, our primary motivation is (a) to demonstrate how “occupied stock” should be interpreted correctly and (b) to provide useful insights into the long-term relationships and short-run dynamics of real office prime rents. The empirical evidence suggests that a one percent rise in office employment increases real rents on average by 1.64% through higher demand for office space. On the other hand, a one percent increase in the supply of office space decreases real rents in the long run by 2.25%. The results from the error correction model show that deviations from the long-run equilibrium lead to an adjustment process which restores equilibrium within approximately 3 years.

Family Offices in Asia with Special Focus on Singapore

The study undertaken aims to gain insights on the relatively unexplored but growing Family office market in Asia and the opportunities for them in the Singapore wealth management industry. Family offices are set up by ultra high net worth (UHNW) families to manage their private wealth. These concept of these offices is well developed in the west i.e., in US and Europe. However, in Asia it is still in its infancy stage. It is slowly catching up as the wealth of the people is increasing along with which the need for personalized wealth management services is also increasing. Family offices form an integral part of the wealth management industry. The needs of clients of this industry are growing. They not only want their wealth to be managed efficiently but also look out for fulfillment of their emotional needs. In Asia, the wealth is mainly held by first generation entrepreneurs who are still looking for the most efficient ways to manage their wealth. This has paved the way for establishment of these offices in Asia as well. This study is an effort to look into the prevalent wealth management industry in Asia, especially in Singapore and the scope of development of family offices here.

Evaluation and Monitoring of Office Markets

The main aim of this study is to understand the relevant variables underlying the mechanisms of office supply, office demand, and market equilibrium to support municipal decision-making processes. Public decisions, at the local level, are expected to ensure that office prices are kept under control, avoiding the speculative behaviour of real-estate agents, and are able to prepare appropriate forms of intervention over supply and demand, in the short term as well as in the medium or long term. In order to reach these goals an identification of the most relevant variables that shape office supply and office demand and their respective elasticities is carried out, and ongoing supply, demand, and market equilibrium hedonic appraisal models are developed. These models allow for: (1) the computation of the influence of the identified variables on office prices (per m2); (2) the measurement of the price gaps between demand and supply according to location; and (3) the characterisation of market balances. Despite short-term adjustments between supply and demand functions, in search of market equilibrium, balances are ephemeral because they are modelled by different factors that change over time. However, these models can be adjusted and applied to different moments in time and extended to other urban contexts. As such they are able to support municipal decisions concerning land-use office location and management.

The interest rate sensitivity of real estate

This study yields a contribution to a better understanding of the interest rate sensitivity of real estate and should enable a more sophisticated interest rate risk management, especially for insurance companies and pension funds. This is achieved by modelling the whole life of a typical office investment property, based on a representative and exclusive data set for the Swiss investment real estate market. The interdependencies between interest rates, inflation, office market rents, current rent paid and expenses are modelled empirically. We perform Monte Carlo simulations that explicitly incorporate the uncertainty of the underlying stochastic processes, of their interdependencies and of modelling uncertainties, thus providing an indication of the final estimate’s uncertainty. Our results show that the interest rate sensitivity of a typical office property is 13.1%, with a standard deviation of 7.8%. The risk premium, the state of the macroeconomic environment, the degree of rotation of the interest curve and the remaining lifetime of the property are found to be the prime determinants of interest rate sensitivity.