Geographical Externalities of Local Real Estate Markets

Despite the recent trend of offshoring branches of UK services industry to remote locations urban theory has yet to enlist a theory of industrial rents that formally takes the properties of substitution between locations into account. This study elaborates on the Fujita, Krugman and Venables model in order to develop theoretical foundations for a pricing theory of contemporary commercial real estate markets, with a focus on offices and services industry which can also extend to include industrial space. It proposes a model that considers location pricing and allocation in an effort to increase the spatial organisation of multinational services firms. Commercial property markets are assumed to be imperfect substitutes in firmsí decision to locate, which on their own turn provide access to labour of differentiated quality. This paper develops empirical evidence in support of a competitive open market price framework of a Dizit-Stiglitz imperfect substitution of alternative office locations in the production of national services industry. It employs panel data methods for the simultaneous estimation of local market rent structures, which include a complex of spillover effects from all other parts of the national market. The estimations are based on time series for 48 UK office centres of locally adjusted estimates of tenancy demand and supply proxies and considers influences from the entity of UK regions and include 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.