Inflation and rental change in industrial property. A multi‐level analysis
| Date | 01 August 2005 |
| Published date | 01 August 2005 |
| DOI | https://doi.org/10.1108/14635780510602417 |
| Pages | 342-363 |
| Author | Catherine Jackson,Michael White |
| Subject Matter | Property management & built environment |
Inflation and rental change
in industrial property
A multi-level analysis
Catherine Jackson
Cass Business School, City University, London, UK, and
Michael White
Department of Property, Business School, University of Aberdeen,
Aberdeen, UK
Abstract
Purpose – The industrial property market has traditionally been under-researched but, in recent
years, studies have ranged from examining rental change at the national level to examining supply
factors at the local level. These studies are valuable to the real estate community, but there still remain
significant gaps. This paper aims to focus on two of these inter-related gaps. The interaction between
inflation and rental change has been largely overlooked at all levels of data aggregation. Further, the
relative importance of national factors, and regional and local factors, in rental determination has also
been ignored.
Design/methodology/approach – National and regional long-run time series models are estimated
accounting for the impact of inflation on real rents, using approaches adopted in macro-economic
consumption function analyses. The statistical validity of these models is confirmed from
co-integration tests. Local level spatio-temporal rental changes are then examined using the
hierarchical method of cluster analysis.
Findings – This paper finds that, at national and regional levels, inflation reduces real industrial
rents. National regional and local factors are all found to be important in governing rental change in
local markets. This implies that factors operating on all spatial scales must be considered in rental
studies.
Originality/value – This paper combines two methodological approaches to examine the interaction
between inflation and rental change, and the relative importance of national, regional and local factors
in rental determination. The results suggest that factors operating on all spatial scales should be
considered in rental studies.
Keywords Industrial property,Leasing, Exchange, Data structures
Paper type Research paper
1. Introduction
The behaviour of rents is of crucial importance for both property valuations and
portfolio construction. Recently, as longer time-series have become available, there has
been an increase in the number of authors modelling the commercial property market
(Ball et al., 1998). However, the industrial sector remains comparatively neglected as,
unlike other commercial property sectors, industrial property is heavily characterised
by owner occupation, downplaying the importance of rental levels and weighting in
institutional portfolios (Thompson and Tsolacos, 1999) and portfolio-orientated
analysis. In addition, studies have traditionally been dominated by the examination of
national factors, in part reflecting data availability, and because theory suggests the
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
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JPIF
23,4
342
Received May 2004
Accepted December 2004
Journal of Property Investment &
Finance
Vol. 23 No. 4, 2005
pp. 342-363
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780510602417
existence of important relationships between factors operating at the national level.
Consequently, a number of areas have yet to be fully investigated. Two such areas are
targeted in this paper, focusing on rental determination.
Looking to the first of these areas, to the best of our knowledge, there has been no
attention paid to the impact of inflation on real commercial property rents, other than
via inflation hedging approaches. Here, through the development of reduced form
rental models at both national and regional levels, incorporating inflation as an
explanatory variable, it is possible to explicitly examine the effect of inflation on real
rental determination. This provides insight into the robustness of models that either
ignore inflation or fail to consider its relative impact at different spatial scales. Moving
to the second area examined in this paper, and continuing the theme of exploring rental
determination at different spatial scales, the paper then goes on to examine patterns of
rental change across local markets. This provides insights into whether, if patterns of
rental change are common across markets, national economic factors can be assumed
to dominate market functioning or, if distinct patterns emerge, regional or local
economies play a dominant role. This also begins to suggest the appropriateness of
grouping markets nationally or by regional location for future research and analysis.
Industrial property rental determination has been investigated with a variety of
focuses, including rental determination at the national aggregate level (Thompson and
Tsolacos, 1999; Kling and McCue, 1991), regional level (Hillier Parker, 1985, 1986) and
local level (Dunse et al., 2005; Thompson and Tsolacos, 2001). Factors underpinning
rental determination operate at both national and local level and vary spatially and
temporally. Studies have tended to use either national or regional data or, where local
data are used, the focus has been on a limited sample of markets. These studies have
not fully considered all aspects of rental determination, such as the importance of
inflation, nor have they considered or explicitly tested spatio-temporal patterns of
rental change across local markets. For example, it is known that local markets differ
in the timing and degree of response to changes in national factors. Further, it is known
that local economic and property market characteristics are crucial in market operation
and that markets are highly heterogeneous in terms of these characteristics. Ind eed,
these differences underpin the rationale for the diversification of property investment
risk.
Borrowing from the portfolio literature to review studies that have begun to
examine patterns of change in local markets, Jackson (2002) focuses on rental change
across local markets, finding markets tend to display similar patterns of change where
they share common economic, labour market and consumer profile characteristics, but
this analysis is limited to the retail sector. Eichholtz et al. (1995) use regional and
super-regional UK and US data. Where within region diversification opportunitie s are
identified, this clearly indicates the existence of different driving forces for markets
within relative proximity, although the results are inconsistent between sectors and
countries. Lee and Byrne (1998) examine groupings of local markets based on region
and, alternatively, on economic function. While the purpose of their research is not to
examine the spatial scale of performance drivers, they do question the use of regional
data and, additionally, find in favour of local factors aggregated according to market
function rather than ge ographical location. However, Lee and Lizieri (1 999)
consistently find all commercial real estate markets display strong commonality,
with the exception of central London office sub-sectors. Hamelink et al. (2000) examine
Rental change in
industrial
property
343
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