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

Abstract

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.