Geographical externalities of local real estate markets : An empirical examination of UK data

Purpose – Despite the recent trend of off‐shoring branches of UK services industry to remote locations, urban theory has yet to enlist a theory of industrial rents that formally takes into account the properties of substitution between locations. The purpose of this paper is to elaborate on the Fujita, et al. model in order to develop theoretical foundations for a pricing theory of contemporary commercial real estate markets. Design/methodology/approach – The paper employs panel data methods for the simultaneous estimation of local market rent structures, which include a complex of spill‐over effects from all other parts of the national market. The estimations are based on time series of locally adjusted estimates of tenancy demand and supply proxies for 48 UK office centres. Influences from the entity of UK regions are considered by applying a variety of deterministic and stochastic structural variability tests. The estimated structures are subjected to multivariate co‐integration tests for an examination of the stability of structural differentials. Findings – The paper appears to find considerable support to the hypothesis that rental spill‐overs exist across the network of office centres in the UK. It suggests that the structure of these markets is characterised by certain properties of substitution and complementarity that have generally been observed in a wide range of real consumer or producer markets. This finding is critical to the development of a policy theory for national planning, which takes into account the impacts of local planning policies on national aggregate economic welfare. Research limitations/implications – This analysis is limited by the unavailability of a coherent theoretical micro‐economic framework, which may be the focus of further research. Originality/value – The focus of this paper is on offices and business services industry but the principles can be extended to include industrial space. The paper questions some of the central assumptions and methodological approaches used in existing industrial location theory. It proposes a model that considers location pricing and allocation in relation to strategies to improve the spatial organisation of multinational services firms.