Modelling Effective Office Rents
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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. Introduction. Introduction

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Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

  • 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


Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

Introduction

  • Introduction

  • Data calculation

  • Models

  • Results


Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

Introduction

Issue

  • Prime office rents are often questioned for lack of responsiveness to market pressures


Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

Introduction

Prime office rents


Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

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


  • Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

    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


    Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

    Introduction

    Prime and effective office rents in London City

    Source: DTZ Research


    Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

    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


    Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

    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


    Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

    Models

    London City

    Source :DTZ Research


    Paris idf office markets

    Results

    Paris IDF Office markets

    Source :DTZ Research


    Brussels office markets

    Results

    Brussels Office markets

    Source :DTZ Research


    Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

    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


    Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

    Conclusions

    Madrid Office markets

    Source :DTZ Research


    Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

    Conclusions

    Manchester Office markets

    Source :DTZ Research


    Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

    Conclusions

    Manchester Office markets

    Source :DTZ Research


    Modelling effective office rents by matt hall dtz 125 old broad street london ec2n 2bq

    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