Vertical Sorting, Height Premiums and Productivity in Multi-Tenant Office Buildings

Abstract

As more people are moving towards urban environments, cities are under pressure and are becoming more dense. Cities are reaching their physical boundaries, limiting the possibilities for horizontal expansion. Solutions towards the problem of densification of cities such as tall buildings are becoming increasingly popular. Existing urban economic literature revolving around this topic has mainly focussed on the horizontal scale of cities and buildings while largely ignoring the vertical aspects. In this study the vertical economics within tall buildings are further researched with an objective to shed light on the interrelationship between price premiums per floor level, vertical sorting through the willingness to pay for height of tenants and productivity measured by revenue per employee within tall buildings in Amsterdam, Rotterdam and The Hague. These factors have contributed to the following main question of this research: What is the interrelationship between price premiums per floor level, vertical sorting and productivity of firms in multi-tenant office buildings in the three largest cities (Amsterdam, Rotterdam & The Hague) of the Netherlands?Empirical analysis through several models results in a highly significant vertical price premium of 0,6% increase of transacted rental price per square meters for each consecutive floor level. In similar fashion a vertical price premium of 1,5% is found for each consecutive relative floor level. Both of these percentages indicate a strong relationship between both absolute and relative floor level height and willingness to pay for height effects such as view and status. Floor levels are grouped in brackets of 5. A non-monotonic trend for floor price premiums is identified, suggesting a progressive trend up to floor level 25th, after which the trend becomes regressive. The regressive pattern after floor 25 could indicate a turning point in terms of rent premiums where the trade-off between amenities and accessibility diminishes and the cost of transportation to the highest floors outweigh the benefits that view and status offer.The results through vertical sorting analysis indicate a difference between sectors ranging from 49,6% to -2,6% in terms of willingness to pay (WTP) for absolute height and 54,7% to 25,8% for WTP for relative height. All analysed industries are more willing to pay more for relative height while there are significant differences between sectors for absolute height. Insurance carriers and law offices tend to locate higher within a building. The results indicate a significant difference between insurance & law offices and the other analysed industries starting from the 50th and 75th percentile.Finally, a significant, but not robust elasticity between the models is found between the floor levels and productivity, indicating that tenants who have more revenue per employee locate higher within a building. The observation where, as productivity increases by 1%, the floor level increases by 4,8%, is a confirmation of previous research and literature where firms who have a higher productivity value have an increased willingness to pay for height.