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SERC/Urban and Spatial Programme Discussion Paper

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


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.


Hans R. A. Koster

7 January 2013     Paper Number SERCDP0125

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This SERC/Urban and Spatial Programme Discussion Paper is published under the centre's Urban programme.