ERES 2015 | Main Sessions A Hedonical Spatial Office Rent Index An Application for Madrid Market Ramiro J. Rodríguez A presentation for ERES Regular Sessions | Istanbul, Turkey The opinions and analyses are the responsibility of the authors and, therefore, do not necessarily coincide with those of BNP Paribas Real Estate

ERES 2015 | Main Sessions Motivation for the research 1.Explaining office letting rents dynamics with an econometric approach 1.An alternative to [weighted] average rents to describe rents evolution 2.Study the impacts of hedonic characteristics 2.Implementing spatial models for the office market 3.Performance comparison between ‘classical’ hedonic models and spatial hedonical models

ERES 2015 | Main Sessions Main findings Significant evidence on spatial feedback Spatial models have higher explanatory capacity than classical hedonical estimations Non-time variant unseen characteristics captured via Spatial endogenous-variable-lag model Business district, age, technical building quality are the main determinants of prices Spatial rent index indicates a lower rent in Madrid in the crisis period than shown by average rents –Sample composition issues corrected –Surface biases corrected

Performance comparison (€/sqm/month) ERES 2015 | Main Sessions

ERES 2015 | Main Sessions On estimation methods Average rents present skewness towards –Large transactions –More transacted area Hedonical models: Not affected by deal sizes yielding more realistic estimated rents Spatial approach: –Fits the idea of non-observed interdependence of price levels among neighbours in real estate transactions –Uses the full power of the database, in opposition to pseudo-panels

ERES 2015 | Main Sessions Market stylized facts Relatively small Madrid’s market, averaging 500,000 sqm of gross absorption each year with around 120 letting transactions Spanish crisis deeply affecting office market –Office space take-up more than halved –Prime rents plummeted 40% –Average rents decreasing around 30% –Strong implementation incentives for new contracts Demand seems to be recovering in

ERES 2015 | Main Sessions Market stylized facts – Prime rents Source: BNPPRE

ERES 2015 | Main Sessions Reference literature Marginal effects Rent index Externalities Hedonic estimations Controlling underlying property characteristics Marginal effects Panel data Controlling unseen location feedback Lagged, error and Durbin models Panel data and pseudo panels Spatial econometrics Kain and Quigley (1970) Straszheim (1974) Clapp (1980) Torto and Wheaton (1994) Malle (2009) Quigley (1995) Gao and Wang (2007) Hansen (2009) Osland (2013) Cliff and Ord (1973, 1981) Anselin (1988, 1996) Kapoor, Kelejian and Prucha (2004) LeSage (2005) Rambaldi and Prasada (2011)

ERES 2015 | Main Sessions Variables and data DDBB with most of the hedonic variables identified the literature review o Transaction list provided by BNP Paribas Real Estate (3,600 obs) o Matched with information from the Spanish Land Registry (Cadastre) o Structure: Half year data o Start date: 2003:1 o End date: 2014:1 o Rent deflated by the implicit GDP deflator (2010=100)

ERES 2015 | Main Sessions Variable definition Endogenous: Real office rent per square meter (rrent)*  Headline rent from new contracts list Regressors: Business districts* (CBD, Centre, Decentralized, Outskirts  left out in regressions) Building characteristics** (Age, Stately, Exclusive, Stories, Quality index, distance to metro entrance) Lease contract*** (Corporate tenant  Dummy variable as commitment proxy ) Time dummies*** (H  left out in regressions) Spatial instrument Geographic coordinates** (X_coord Y_coord) Source: * BNPPRE ** Cadastre *** Calculated

Office zones ERES 2015 | Main Sessions

Market intensity Office transactions Q1-Q ERES 2015 | Main Sessions Transaction density under 100 mts

ERES 2015 | Main Sessions Spatial hedonical model (1)

Spatial hedonical model (2) ERES 2015 | Main Sessions

ERES 2015 | Main Sessions Regression analysis (OLS) Number of observations: 3,912 R-Squared: 0.62 Root MSE: 0.22 Estimatorp-valueEstimatorp-valueEstimatorp-value cons cbd H H centre H H dec H H age H H floors H H exclusive H H qual_adj H H metro_distance H H corporate H H

Regression analysis (Spatial) ERES 2015 | Main Sessions TestStatisticdfp-value Spatial error: Moran's I Lagrange multiplier Robust Lagrange multiplier Spatial lag: Lagrange multiplier Robust Lagrange multiplier

ERES 2015 | Main Sessions Regression analysis (Spatial) Number of observations: 3,912 Variance ratio: Estimatorp-valueEstimatorp-valueEstimatorp-value cons H H rho H H cbd H H centre H H dec H H age H H stately H H floors H H exclusive H H qual_adj H corporate H

Stability test ERES 2015 | Main Sessions

Marginal effects comparison ERES 2015 | Main Sessions rhoNA cons cbd centre dec age floors exclusive qual_adj metro_distance NA corporate

Residuals normality (non parametric test) ERES 2015 | Main Sessions Parametric tests on residuals yield non-normal residuals distributions Issues on sample size

The prototype office ERES 2015 | Main Sessions cbdcentredecx_coordy_coordage (years)statelyfloorsexclusivequal_adjmetro_distancecorporatelrrent ? ? ? ,5401? 1.Definition of the archetype office Average characteristics by zone Age, floors, metro distance, quality index, geographic coordinates

Hedonical rent estimation ERES 2015 | Main Sessions

ERES 2015 | Main Sessions Rent estimation (€/sqm/month)

Rent estimation (€/sqm/month) ERES 2015 | Main Sessions

Performance comparison (€/sqm/month) ERES 2015 | Main Sessions Flight to quality Hedonical rentAverage rentGeo-hedonical rentWeighted average rent

Rent index ERES 2015 | Main Sessions

Conclusions ERES 2015 | Main Sessions 1.Explanatory capacity improves with Spatial models 2.Estimation with spatial component yields normal residuals 3.Estimated rent index corrects: 1.Sample composition effects 2.Deal size issues 4.Classical hedonic techniques issues such as unobservable characteristics are corrected 5.Side products such as semi-elasiticities are valuable for market insights

ERES 2015 | Main Sessions Q&A Suggestions are much appreciated! Thank you