Tall office buildings command ‘height premium’ for rents

Occupiers are willing to pay higher rents in tall office buildings, a Dutch researcher told the ULI Trends conference in London last week.

Pointing to a recent survey conducted in the Netherlands, Hans Koster, assistant professor at the University of Amsterdam, said that taller buildings are much more expensive in terms of rent per m2. ‘The main message is that firms are willing to pay on average about 4% more. This implies a substantial premium associated with tall buildings.’

Koster based his conclusion on data compiled on buildings in three Dutch cities, Amsterdam, Rotterdam and Utrecht with an average height of 29 metres. The results suggest that firms are willing to pay around 4% more to locate in a building that’s 10 metres taller. The 1% of buildings 100 metres or more are 40% more expensive than the 40% of buildings less than 20 metres high. There’s little effect for the majority of offices in between.

Koster said the willingness to pay a ‘height premium’ is due to a combination of within-building agglomeration economies, a landmark and a view effect. ‘The results suggest that the sum of the landmark and view effect is about 2.8–5.5% of the rent for a building that is five times the average height. This is quite sizeable.’

Koster’s study ‘Is the sky the limit? High rise office buildings and rents’ was the 2014 winner of the Urban Land Institute Prize. The survey draws on 4,500 rental transactions in the Netherlands.

Commenting on a recent article in The Economist, Koster said one of the biggest challenges for the world is how to accommodate the hundreds of millions of people who are flocking to cities. The main economic reason for building tall is the high price of land in urban agglomerations, and the ability to save on land area.

But there are other benefits aside from this traditional argument, Koster said. Tall buildings generally have better amenities and firms seem to be more productive in tall buildings. They also have what he described as ‘landmark effects’: ‘The tallest buildings attract a lot of attention; they attract customers and they command a premium because everybody knows the building.’

In his concluding remarks, Koster said more research was needed to compare the positive versus the negative effects. ‘But,’ he added, ‘urban planners should be less reluctant about the construction of high-rise office buildings, especially when the price of land is high.’