Modelling Effective Office Rents
by
Matt Hall
DTZ, 125 Old Broad Street, London, EC2N 2BQ
Tel: +44 (0)20 3296 3011 Email: matthew.hall@dtz.com
&
Tony McGough
DTZ, 125 Old Broad Street, London, EC2N 2BQ
Tel: +44 (0)20 3296 2314 Email: tony.mcgough@dtz.com
Page 0
Introduction
• Introduction
• Data calculation
• Models
• Results
Page 1
Introduction
Issue
• Prime office rents are often questioned for lack of
responsiveness to market pressures
Page 2
Introduction
Prime office rents
£ psf
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
Leeds
London - City
Source: DTZ Research
Page 3
Introduction
Issue
• Prime office rents are often questioned for lack of
responsiveness to market pressures
Some reasons
• Smaller markets struggle to get evidence of declines
• Less active market especially in quiet times
• But see some example of this even in London
• Asymmetric Properties of rental movement (Hendershott et
al)2008
• Definitely something there but a quantifiable known is effective rents
Page 4
Introduction
Effective rents
• Incentives are used to hold up rents in downturns
• It is in landlord’s interests to maintain headline rents
• Supports capital value and provides a market floor
• Provides a lock in value for developers
• Market evidence used in rent reviews
• Especially with upward only rent reviews
• Impact and how to treat incentives for investment returns
well documented (Brown) 1995
Page 5
Introduction
Prime and effective office rents in London City
£psf
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Source: DTZ Research
Page 6
Data Collection
• Need to standardise approach
Take account of standards
– UK 3 month always free for fit out
– Other markets in ‘turn key’ condition
– No rent frees beyond first break (5 years in UK 3
years in Italy)
• Standardise lease lengths at 10 years
– No rent frees beyond first break (5 years in UK 3
• Calculate effective rent
(((Lease length – (rent free period-fit out allowance))/lease
length)*prime rent
Page 7
Models
• From this we calculate an implicit rent series of rent free
months and model this
• Other variables used
•
•
•
•
Availability
Stock
Main driver of prime rent – not the rent itself
Lagged incentive
Page 8
Models
London City
Coefficient
C
DLOG(UKLOOGVAJKL)
UKLOCOAV/UKLOCOST
LOG(UKLOCORF(-1))
0.883235
-4.725
8.169706
0.487866
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.857329
0.814528
0.248279
0.616427
1.994971
20.03045
0.00015
Source :DTZ Research
Std. Error
0.385658
2.098057
2.197412
0.136537
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
t-Statistic
Prob.
2.290203
-2.252081
3.717877
3.573143
0.045
0.048
0.004
0.0051
2.6595
0.576503
0.286433
0.46902
0.269531
2.160189
Page 9
Results
Paris IDF Office markets
€psm
900.00
800.00
700.00
600.00
500.00
400.00
300.00
200.00
100.00
0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Prime Rent
Source :DTZ Research
Effective Rent
Page 10
Results
Brussels Office markets
€ per sq m
300.00
280.00
260.00
240.00
220.00
200.00
180.00
160.00
140.00
120.00
Prime Rent
Source :DTZ Research
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
100.00
Effective Rent
Page 11
Conclusions
• Rents are similarly volatile at effective rents level
• Some markets (UK) have used incentives a long time but
other markets (Belgium) are using them more – particularly
in difficult conditions
• Some markets (Madrid) do not use incentives and thus
appear more volatile
Page 12
Conclusions
Madrid Office markets
€ per sq m
500.00
450.00
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
1995199619971998199920002001200220032004200520062007200820092010201120122013
Prime Rent
Source :DTZ Research
Effective Rent
Page 13
Conclusions
Manchester Office markets
£psf
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Prime Rent
Source :DTZ Research
Page 14
Conclusions
Manchester Office markets
£psf
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Prime Rent
Source :DTZ Research
Effective Rent
Page 15
Conclusions
• Rents are similarly volatile at effective rents level
• Some markets (UK) have used incentives a long time but
other markets (Belgium) are using them more – particularly
in difficult conditions
• Some markets (Madrid) do not use incentives and thus
appear more volatile
• Incentives are being increasingly used and this trend will
continue
Page 16