Office rents, mixed-use developments, and agglomeration economies: a panel data analysis

Publication Date07 Aug 2017
AuthorErvi Liusman,Daniel Chi Wing Ho,Hiu Ching Lo,Daniel Yet Fhang Lo
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Office rents, mixed-use
developments, and agglomeration
economies: a panel data analysis
Ervi Liusman
School of Hotel and Tourism Management,
The Chinese University of Hong Kong, Hong Kong
Daniel Chi Wing Ho
Faculty of Design and Environment,
Technological and Higher Education Institute of Hong Kong, Hong Kong
Hiu Ching Lo
Department of Real Estate and Construction,
The University of Hong Kong, Hong Kong, and
Daniel Yet Fhang Lo
Centre for Real Estate Research, The University of Aberdeen, Aberdeen, UK
Purpose The purpose of this paper is to investigate the relationship between office rents and mixed-use
development in the context of agglomeration economies.
Design/methodology/approach Using a sample of 10,209 observations in 100 Grade A office buildings
in Hong Kong from January 2001 to June 2011, the authors estimated office rent regression using unbalanced
panel data analysis.
Findings The results show that rents decreased with an increase in distance from retailers and hotels.
Furthermore, the results revealed that, ceteris paribus, office tenants were willing to pay higher rents in a
mixed-use than in a single-use office development.
Research limitations/implications There is an existence of agglomeration economies due to the clustering
of various industries in mixed-use developments, which allow for their close proximity to potential clients.
Practical implications The diversity of activities in a mixed-use development benefit its tenants and,
thus, convince them to pay higher rents. Higher rents generated by a mixed-use facility will attract more
investors to it. Investors should seek opportunities to capitalize on their equity in mixed-use developments.
Originality/value This paper attempts to uncover a relationship between office rents and mixed-use
developments by drawing on the concept of agglomeration economies.
Keywords Diversity, Proximity, Panel data analysis, Agglomeration economies, Mixed-use development,
Office rents
Paper type Research paper
1. Introduction
Office rents are very much affected by economic conditions and long-run equilibria in the
office market. Other determinants that affect office rents include physical accommodation,
location, and tenure rights (Dunse and Jones, 1998). On the subject of agglomeration
economies, the effect of combining different uses into a given amount of space may cause
office rents in a mixed-use development to surpass those in single-use developments.
Office tenants benefit from agglomeration as a result of more intensive interaction with
other firms rather than interaction with firms within their own industry (Glaeser et al., 1992).
Thus, rents in mixed-use developments are likely to be higher.
Mixed-use developments have gained in popularity over the past two decades (Rabianski
et al., 2009). This form of development has been advocated in numerous recent planning and
development policies in the West, such as in the Urban White Paper of the UK (Department of
Journal of Property Investment &
Vol. 35 No. 5, 2017
pp. 455-471
© Emerald PublishingLimited
DOI 10.1108/JPIF-02-2017-0015
Received 16 February 2017
Accepted 24 March 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
rents and
the Environment, Transport and the Regions and Prescott, 2000; Department for Communities
and Local Government, 2006) and New Urbanism and Smart Growth initiatives of the USA, as it
offers a live, work, playcommunity by combining multitudinous socio-economic activities
within one locality. This may help reduce commuting costs and ease traffic flow. In fact,
mixed-use developments have existed since Medieval times, when walking was the predominant
mode of transportation, in the form of a market square (Witherspoon et al., 1976; Rabianski et al.,
2009). However, as a citys economy grows, the efficiency effects arising from its sheer size will
be overshadowed by diseconomies of scale that result from congestion, a dirty and noisy
environment, crime, and other social disorders. The introduction of the automobile further
motivated urban dwellers to move to the cleaner suburbs. Consequently, places for living,
working, entertainment, and shopping were spatially separated to create urban sprawl
(Leinberger, 1998).
Pioneered by Jane Jacobs (1961), the mixed uses of office and retail spaces were first
studied during the 1970s as a result of the gentrification of urban historic districts. Jacobs
work has been extensively cited due to her significant contributions to the scholarship on
mixed-use communities. In her seminal book, The Death and Life of Great American Cities,
she encouraged integrated diversity and mixed-use buildings in communities, arguing that
a vibrant and successful neighborhood is conceived from a diverse use of fine-grain
combinations ( Jacobs, 1961). Her idea has attracted the attention of urban planners because
mixed-use buildings can limit urban sprawl, ease car dependence, reduce pollution, conserve
energy, and enhance sustainability (Walker, 1997; Leinberger, 1998; Fillion, 2003;
Hoppenbrouwer and Louw, 2005; Rabianski et al., 2009). During the late 1990s, the
concepts of New Urbanism and Smart Growth emerged in the USA. The former is a
planning concept that deals with mixed land use and focuses on mixed activities in
neighborhoods to reduce commute times, increase the amount of affordable housing, and
control urban sprawl (Congress for the New Urbanism, 2000). The latter addresses urban
density; spatial separation; and the association between land use, the choice of transport
mode, and mobility patterns (American Planning Association, 1999). In European planning
practice, there has been a notion of the compact city, which is another concept that focuses
on urban planning and improving environmental and economic conditions ( Jenks and
Burgess, 2000; Maat, 2001). More specifically, the European Commission (Commission of the
European Communities, 1990) has embraced the notion of urban containment and more
compact modes of development with mixed uses, which could reduce urban sprawl and
preserve agricultural and amenity land. Given more compact and diversified uses in much
closer proximity to each other, the use of public transport and alternative means of travel,
such as cycling and walking, is feasible ( Jenks and Jones, 2010). All this is conducive to a
more efficient use of land resources.
Mixed-use has becomean important planning concept in several American and European
cities (Hoppenbrouwer and Louw,2005). Despite the focus of theseconcepts on spatial quality
through mixing land use,the current planning practice emphasizes mixed and compact land
uses that could create synergy as a result of interactive activities. This concept is rooted in
agglomeration economies (Vreeker et al., 2004). Mixed-use is the concentration and
diversification of activities that promote vitality, bustling town centers, less reliance on cars,
and reduced travel (Coupland, 1997). All these factors help improve environmental quality,
social equity,and economic strength (Grant,2002). Owing to its ability to createattractive and
sustainable urban environments, a mixed-use development is now one of the essential
elements for compact cities and urban sustainability (Rowley, 1996; Foord, 2010).
As mentioned by Jacobs (1961), diversity (mixed-use in this case) creates vibrant and
successful neighborhoods. This often brings positive economic effects to a community and
may do the same forthe office market. If both buyers andsellers have perfect knowledgeof a
market, the rentsfor offices located in mixed-use developments should be higherthan those in

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