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Rocketing Rents The magnitude and attenuation of agglomeration economies in the commercial property market


  • Hans R. A. Koster


Rocketing rents in urban areas are likely explained by agglomeration economies. This paper measures the impact of these external economies on commercial property values using unique micro¿]data on commercial rents and employment. A measure of agglomeration is employed that is continuous over space, avoiding the modifiable areal unit problem. To distinguish agglomeration economies from unobserved endowments and shocks, I use temporal variation in densities and instrumental variables. The spatial extent of agglomeration economies is determined by estimating a spatial bandwidth within the model. The results show that agglomeration economies have a considerable impact on rents: a standard deviation increase in employment density leads to an increase in rents of about 10 percent. The geographical extent of these benefits is about 15 kilometres. The bias of ignoring time¿]invariant unobserved endowments and unobserved shocks seems to be limited.

Suggested Citation

  • Hans R. A. Koster, 2013. "Rocketing Rents The magnitude and attenuation of agglomeration economies in the commercial property market," SERC Discussion Papers 0125, Spatial Economics Research Centre, LSE.
  • Handle: RePEc:cep:sercdp:0125

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    References listed on IDEAS

    1. Davis, James C. & Henderson, J. Vernon, 2008. "The agglomeration of headquarters," Regional Science and Urban Economics, Elsevier, vol. 38(5), pages 445-460, September.
    2. Pierre-Philippe Combes & Gilles Duranton & Laurent Gobillon & Sébastien Roux, 2010. "Estimating Agglomeration Economies with History, Geology, and Worker Effects," NBER Chapters,in: Agglomeration Economics, pages 15-66 National Bureau of Economic Research, Inc.
    3. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wbsle, November.
    4. Matthew P. Drennan & Hugh F. Kelly, 2011. "Measuring urban agglomeration economies with office rents," Journal of Economic Geography, Oxford University Press, vol. 11(3), pages 481-507, May.
    5. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2008. "Spatial wage disparities: Sorting matters!," Journal of Urban Economics, Elsevier, vol. 63(2), pages 723-742, March.
    6. Martijn J. Burger & Frank G. van Oort & Bert van der Knaap, 2010. "A Treatise on the Geographical Scale of Agglomeration Externalities and the MAUP," SCIENZE REGIONALI, FrancoAngeli Editore, vol. 9(1), pages 19-39.
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    More about this item


    commercial buildings; hedonic pricing; agglomeration economies; spatial decay; kernel densities;

    JEL classification:

    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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