The Agglomerative Effects of Neighborhood and Building Specialization on Office Values

We investigate how horizontal (neighborhood) and vertical (tenants) agglomeration impacts the value of office buildings. We find that industry specialization of a building’s 5-digit zip code neighborhood and the extent to which a building is specialized by tenants within the same industry leads to a significantly higher rental rate and transaction price. By linking the within-building industry composition to its neighborhood industries, we find that spillovers are likely to be the most important attribute to the agglomeration gains in office building performance. We find that the agglomeration gains are also recognized by the stock market: REITs’ experience positive (negative) abnormal returns when acquiring (disposing) a building with higher tenant industry concentration or neighborhood industry specialization. Our findings suggest that agglomeration economies are operative at the neighborhood level as well as within individual buildings. Commercial rents reflect horizontal and vertical agglomeration gains which can in turn be used as proxies for agglomeration economies.