Rocketing rents in urban areas are likely explained by agglomeration economies. This paper investigates the impact of these external economies on commercial property values, using unique micro data on commercial rents and employment.
A measure of agglomeration economies is applied that is continuous over space, avoiding the modifiable areal unit problem. To distinguish agglomeration economies from unobserved endowments and shocks, temporal variation in densities and instrumental variables have been used. The spatial extent of agglomeration economies was determined by estimating a spatial bandwidth within the model. The results show that agglomeration economies have a considerable impact on office rents: a standard deviation increase in employment density leads to a 10% increase in office rents. The geographical scope of these benefits is about 15 kilometres. The bias of disregarding time-invariant unobserved endowments and unobserved shocks seems to be limited.
PBL working paper 12