Are Corporate Office Buildings Priced Differently?

Abstract

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. This study investigates 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 located in the largest office market in Latin America is partitioned based on the average size of leasable units. This approach captures interactions between different groups of investors and occupiers, and is commonly adopted by local market practitioners due to lack of detailed information on market participants. The pricing schedule for these two groups of buildings are then empirically compared through hedonic regression analysis and parameter stability tests. Findings: Our 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: The results imply that “office properties” are 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 properties has 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.