The Effects of Clustering on Office Rents: Empirical Evidence from the Rental Office Market in Ho Chi Minh City

1. INTRODUCTION The classical theory of office location argues that office rents are based on face-to-face contact possibilities which are a decreasing function of distance to the central business district (CBD)(Heilbrun 1987). Even with the exponential change of technology, face-to-face contact is still an important factor in determining office rent (Bollinger et al. 1998). Proximity to other office buildings creates positive effects on office rents. Finding empirical evidence of the clustering effect, especially in the developed world, has been a significant interest of researchers (Archer & Smith 2003; Jennen & Brounen 2009; Shilton & Stanley 1999). Approaching the issue from economies of scale, a synonym of agglomeration, Archer & Smith (2003) explain office clustering using demand economies of scale and demand for marketing image. The authors have found empirical evidence of clustering effects on the office market in Houston, Texas. Jennen & Brounen (2009) extended the existing literature by testing the rent effects of office clusters empirically outside the United States. They also found empirical evidence of clustering effects on office rents in Amsterdam. However, both works by Archer & Smith (2003) and Jennen & Brounen (2009) are still limited to the developed world. To extend the coverage of the literature, following similar methodologies and approaches, I demonstrate that the effects of clustering on office rents also exist in the thin and emerging market of HCMC. In other words, results of this article support the argument by Malpezzi (1999) that real estate market behavior is remarkably similar from place to place. The remainder of this article is organized as follows: The second section is a literature review of agglomeration economies. The third section explains the ways to measure clusters. The fourth section briefly surveys the office market in HCMC and explains rationales for choosing HCMC. The data is described in the fifth section. The sixth and seventh sections present the empirical results and robustness check. The eighth section compares the results in HCMC to those in Houston and Amsterdam. The conclusion will be in the final sections. 2. AGGLOMERATION ECONOMIES Agglomeration economies are the benefits resulting from businesses located in close proximity to one another in cities and industrial clusters (Glaeser 2010). It is widely observed that skyscrapers (primarily occupied by business offices) are concentrated in most cities' central business districts (CBD) around the world, from New York to HCMC. High rise buildings are highly clustered together (Shilton & Stanley 1999). This phenomenon is due to advantages of proximity (Rosenthal & Strange 2004). There are efficiency gains and cost savings that result from proximity to customers, suppliers, workers, and even competitors (Yankow 2006), and the benefits of the agglomeration economies come from transportation cost savings and increasing returns (Duranton & Puga 2004). There are different ways to explain sources of agglomeration, but they are basically based on the argument by Marshal (1890) that knowledge spillovers, input sharing, and labor market pooling are the three main sources (Duranton & Puga 2004; Rosenthal & Strange 2004). Information exchange (Jaffe et al. 1993), industrial linkages (Henderson et al. 1995), and labor market search (Kim 1989) create agglomeration economies (Timothy & Wheaton 2001). Proximity facilitates information exchange to create knowledge spillovers, which makes industries locate close together, and pooling of industries become larger and denser. The clustering enables firms to recruit appropriate employees and enables employees to find work which commensurate with their abilities and competence. This means that the cost of finding jobs and filling vacancies is less and productivity increases. Approaching slightly differently, Duranton (2004) argues that sharing, matching, and learning are three main mechanisms or micro-foundations of agglomeration economies. …