Are corporate office buildings priced differently?

Publication Date02 Jul 2018
AuthorOdilon Costa,Franz Fuerst,Wesley Mendes-da-Silva
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Are corporate office buildings
priced differently?
Odilon Costa
Department of Economics,
Pontificia Universidade Catolica de Sao Paulo, Sao Paulo, Brazil and
Department of Finance,
Fundacao Getulio Vargas Escola de Administracao de Empresas de Sao Paulo,
Sao Paulo, Brazil
Franz Fuerst
Department of Land Economy, University of Cambridge, Cambridge, UK, and
Wesley Mendes-da-Silva
Department of Finance,
Fundacao Getulio Vargas Escola de Administracao de Empresas de Sao Paulo,
Sao Paulo, Brazil
Purpose While broader property-type categories of real estate markets have been scrutinized at
microeconomic level in some segments namely, residential, retail, industrial and hospitality, there is limited
evidence showing that local office markets can be viewed as monolithic and economically integrated entities.
The purpose of this paper is to investigate how occupiers differ in their willingness to pay for principal office
rent determinants in the corporate and non-corporate sectors.
Design/methodology/approach A sample of properties lo cated in the largest o ffice market in Latin
America is partitione d based on the average size of l easable units. This app roach captures interac tions
between different gro ups of investors and occupi ers, and is commonly adop ted by local market
practitioners due to la ck of detailed informatio n on market participant s. The pricing schedules f or these
two groups of building s are then empirically compare d through hedonic regressio n analysis and parameter
stability tests.
Findings The regressions show that corporate and smaller occupier properties form distinct spatial and
non-spatial submarkets, but that their temporal patterns are quite similar. Thus, these property-type
segments can be classified as imperfect substitutes with distinct pricing schemes, but not as a unique market,
as their pricing schedules are not generalizable.
Practical implications Theresultsimplythatofficepropertiesare too complex and disparate to be reliably
examined with a simple aggregate approach as practiced in developed office market research since the 1980s. The
fragmented reality of office propertieshas important implications for investment decisions and real estate valuation.
Originality/value This paper shows that the corporate office market exhibits distinct characteristics
and key determinants of office price and rent valuation differ significantly between the corporate and
non-corporate segments. The corollary of these findings is that market studies that require reliable estimates
of price drivers may be enriched by modeling these two segmented markets separately. It is also important to
note that this distinction cuts across the established A/B/C office space quality classification.
Keywords Market segmentation, Property valuation, Building adaptability, Hedonic modelling,
Office properties, Price determinants
Paper type Research paper
Understanding the drivers of real estate prices is a key matter for real estate developers and
investors. With this in mind, researchers continue to improve hedonic pricing techniques to
quantify the determinants of real estate value and to estimate the impact of such
determinants on rent and prices (Wen et al., 2017). Estimated coefficients in these models are
typically assumed to remain constant throughout entire study areas or property-type
segments, implying that the market under consideration is sufficiently homogeneous to
Journal of Property Investment &
Vol. 36 No. 4, 2018
pp. 348-365
© Emerald PublishingLimited
DOI 10.1108/JPIF-01-2018-0004
Received 15 January 2018
Revised 1 April 2018
Accepted 4 April 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
be analyzed on a stand-alone basis provided that sufficient controls are already included in
the estimated models (e.g. Wheeler, 2014; McCord et al., 2012).
Many studies have compared pricing schedules of occupational prices in the context of
residential real estate (e.g. Helbich et al., 2014; Berry et al., 2003). Certain researchers have
also explored the matter on industrial (Black et al., 1997) and retail markets (Ke and
Wang, 2016; Hardin and Carr, 2006). Their findings highlight complex interactions between
regional submarkets and different uses of real estate properties directly at microeconomic
level and challenge conventional definitions of real estate segments. However, previous
work has not typically sought to explore the underlying reasons for the violations of the
law of one price(Owen and Richard, 2003; Isard, 1977), such as different requirements or
utility functions of user groups, or directly assessed how the segmented reality of office
properties may affect the price generation process of this property type.
The goal of this study is to evaluate the relationship between building characteristics,
locational submarkets and economic change across different property-type segments of the
office market. We split properties based on the average size of leasable units and test
whether rent premiums associated with these set of determinants can be generalized or are
specific to each group. The breakdown allows us to assess how different users value
ordinary property features.
The contributions are twofold. First, we outline some of the practical motivations and
develop a conceptual grounding to explain why different office users may not necessarily
value hedonic characteristics in similar ways. Our theoretical framework shows that pricing
discrepancies may arise from transaction costs (objective and subjective) which limit the
ability of different users to arbitrage across property-type segments. Although office
buildings serve for the same purpose, they are not readily suitable for all types of uses.
Ultimately, we may view certain relocation costs (subjective) as an endogenous component
of each firms capital allocation choice (Black et al., 1997). The optimal assignment of
building characteristics would, thus, be dictated by the productive activity carried out at an
office property. We then exploit empirically which sets of features are prone to valuation
discrepancies by occupiers of office space.
Motivated by the extant literature on market segmentation and on hedonic pricing, this
study explores two research questions:
RQ1. Are property-type segments also relevant in the context of office properties?
RQ2. What are the potential drivers of pricing differentials?
This paper is organized as follows. The second section provides a background discussion
focusing on the literature development on market segmentation with respect to office
markets. This is followed by a set of practical motivations and a theoretical grounding for
localized valuation of hedonic attributes. Next, the main empirical section outlines the data,
methodology and results. Finally, conclusions are drawn.
Related literature
Office buildings are not commodities: each has unique features that appeal different users,
lenders and landlords. The confluence of location, function (degree to which a property can
physically accommodate different occupier demands and configurations), form (exterior and
interior design,finish quality, and configuration of common and private areas) andcost drive
suitability for any given user. At the same time, different occupiers may not necessarily
weight these features in similar ways.
Clapp et al. (1992) show that cross-sectional and dynamic variables are relevant
determinants of patterns in office market prices. Intra-metropolitan location reflects
substantial spatial specialization by type of office activity and growth in selected industries,

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