Office Real Estate Investment in the World City Network: The Effects of Financial Crisis

ERES Annual ConferenceEdinburgh, June 2012

Colin Lizieri, Kathy Pain and Sandra VinciguerraDept of Land Economy, University of CambridgeHenley Business School, University of Reading

In memory of Andrew Pain 1981-2012

ESPON - TIGER

• ESPON– the European Spatial Planning Observation Network (2002-2006)– European Observation Network on Territorial Development and Cohesion

(2008-2013 programme)– EU funded Research Network carrying out applied research on “territorial

dynamics” and providing evidence base for regional spatial policy development.

• TIGER – “Territorial Impact of Globalization for Europe and its Regions”– Aim: to understand the impact of globalization on European regions and

cities and to examine spatial flows from globalisation at a European level. • Partners

– IGEAT-ULB (Belgium), Sapienza - Università di Roma (Italy); University of Reading (UK); NIGGG - Bulgarian Academy of Sciences (Bulgaria); CNRS (France), Jönköping International Business School (Sweden)

The Space of Flows and Place of Work

• Firms, businesses, individuals linked together in set of overlapping networks … cities act as nodes in flows of information, capital etc.

• In an internet-enabled world, people can, in principle, work anywhere … but they must work somewhere.

• Offices, agglomeration and clustering – particularly in international financial centres, creation of critical mass of office space used by FBS, APS firms.

• Capital flows to create and invest in that space – which is then locked down spatially.

• Can we capture and explain those flows, as a proxy for integration in global financial system?

Dataset

• Data provided by Real Capital Analytics– Commercial real estate transactions 2007-2010– Top 1,000 transactions in each year, 3,974 sales, $888billion– 2,744 sales, $580billion excluding land sales– 1594 office sales, $361billion => 62% by value of non-land sales

• Information available/collected includes property location, price, buyer name and their location

• Trace and aggregate information to city level – estimate dyads (capital flows from city one to city two) and self-investment.

• Acknowledge definitional issues: ownership in a world of real estate funds, location, arms length transactions.

Analysis of the Network of Flows

• TIGER Aims to Trace Globalisation Flows in European and International Territorial Space

• Visualization Techniques Based on Network Analysis• Aim to Reveal Position of Cities in Terms of Importance

and Centrality in Global Investment Flows• Apply “Spring Embedded Algorithm” to Data

– Forces assigned to each link (reflecting flows between dyads)– Iterative process changes “distance” between nodes – Approximate equilibrium position with node sizes and links

proportional to flows– Can add geographical locks

Sales Activity and the Global Financial Crisis

2007 2008 2009 20100

20,000,000,000

40,000,000,000

60,000,000,000

80,000,000,000

100,000,000,000

120,000,000,000

140,000,000,000

0

50

100

150

200

250

Office Transactions 2007-2010

Sales VolumeDeals #n

National Office Investment Inflows 2007-2010

Australia

Austria

Belgium

Bermuda

Brazil Canada

Cayman Islands

Channel Islands

Chile

China

Czech Republic

DenmarkFinland

FranceGermany

Hong Kong

Hungary

Iceland

India

Ireland

Israel

Italy

Japan

Kuwait

Lebanon

Libya

Luxembourg

Macao

Malaysia

Mexico

Netherlands

New Zealand

Norway

Oman

Philippines

Poland

Portugal

Qatar

Romania

Russia

Singapore

South Korea

Spain

Sweden

SwitzerlandTaiwan

United Arab Emirates

United KingdomUnited States

National Office Investment Outflows 2007-2010

Australia

Austria

Belgium

Bermuda

Brazil Canada

Cayman Islands

Channel Islands

Chile

China

Czech Republic

DenmarkFinland

France

Germany

Hong Kong

Hungary

Iceland

India

Ireland

Israel

Italy

Japan

Kuwait

Lebanon

Libya

Luxembourg

Macao

Malaysia

Mexico

Netherlands

New Zealand

Norway

Oman

Philippines

Poland

Portugal

Qatar

Romania

Russia

Singapore

South Korea

Spain

Sweden

SwitzerlandTaiwan

United Arab Emirates

United Kingdom

United States

Global office market inflows, 2007-2010

Global office market outflows, 2007-2010

“Self-Investment” 2007-2010

Thinning Out the Network: Inflows 2007

Beijing

Calgary

DubaiHong Kong

London

Madrid

Miami

Moscow

Mumbai

New YorkParis

Santiago

Sao Paulo

Singapore

Sydney

Tokyo

Thinning Out the Network: Inflows 2010

Auckland

Beijing

Dubai

FrankfurtHamburg

Hong KongHonolulu Mexico City

MunichNew York

Paris

Rio De Janeiro

San Francisco

Santiago

SeoulShanghai

Singapore

Stockholm

Sydney

Tokyo

Financial Networks and Investment Flows

• 0.604 correlation between GaWC FNC and Investment uncorrected for size, region etc.

10 20 30 40 50 60 70 80 90 100 1100.1

1

10

100

GaWC Financial Connectivity

Log

Inve

stm

ent I

nflow

Capital Flows and the Urban Hierarchy

City

InvestmentCapital Inflows

Self Investment

Capital Outflows

Network Flows

GaWC GNC 080.598 0.561 0.525 0.484 0.593

GaWC FSNC 080.604 0.561 0.538 0.489 0.579

Z/Yen GIFC100.619 0.577 0.538 0.560 0.651

• How Do City Investment Flows Relate to Global System of Cities? Using GaWC 2008 and GIFC10

Investment Concentration: Target Cities Office Market Acquisitions 2007-2010

Lond

on

New Y

orkTok

yoPari

s

Singap

ore

Shang

hai

Washin

gton

Seoul

San Fran

cisco

Madrid

Frankfu

rt

Mosco

wBeij

ing

Chicag

o

Sydne

y0

10,000

20,000

30,000

40,000

50,000

60,000

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

Office Investment by City Cumulative Share

Investment Concentration: Outflows Office Market Acquisitions 2007-2010

New Y

ork

Boston

Lond

on

Munich

Frankfu

rt

Dublin

Hambu

rg

Madrid

Tokyo

Singap

ore

Stockh

olm

Los A

ngele

s

Sydne

y

Housto

nSeo

ul0

5000

10000

15000

20000

25000

30000

35000

40000

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Outward Investment by City Cumulative Share

O.59 correlation between inflows and outflows

Conclusions, Implications and Issues - 1

• Office Market Investment Strongly Concentrated– Capital flows into cities– Capital flows from cities– Capital formation within cities

• Target and Source Cities:– Major International Financial Centres– Key nodes in APS networks

• Office Investment:– Locks capital to spatial locations– Locks major cities together & to global capital markets– Systemic risk & contagion: the Towers of Capital hypothesis

Conclusions, implications and issues - 2

• Some Questions and Issues Raised:

• Do real estate capital flows proxy for integration into global financial / APS networks?

• Causality issues: does city status cause capital flows or do flows drive city status?

• What are the implications for city economic growth strategies? What are benefits and costs of financial cluster strategies?

• Longer term signals and emerging markets: land sales as a precursor to urban restructuring?