How expensive is the top of a skyscraper vs the bottom?

China is a market full of high rise office towers, with some cities having over 100 Grade A office buildings in operation and dozens more in the pipeline. What are some of the patterns in how much the space rents for within a given building?

1. We assume that upper floors rent for more, but by how much?
2. Do tenants from different industries, such as finance, banking, and professional services (FIREBS) pay more?
3. Is there a visible premium paid for new setups as opposed to renewals?
4. Do larger tenants pay less?

Visualizing rent premiums

To answer these questions, JLL Research turned to a dataset that offered a clear perspective: a three-year history of office leases in the "Tier 1.5" city of Tianjin. This particular city was a perfect place to look for one key reason: market rents remained flat over an extended period of time, making it easier to measure the influence of non-cyclical factors. Across 625 transactions in the Grade A and B buildings of Tianjin, our analysis revealed:

• High-zone spaces rented for 15% more than low zone spaces, all else being equal.
• New setups paid 5% more, all else being equal.
• Finance, Insurance, Real Estate, and Business Services paid 5% more than other tenant types, all else being equal.
• The effect of other variables was less clear, including: whether a company was domestic or foreign, deal size, lease length, and age of the building.

The predictive power of the model wasn’t excellent, explaining only 53% of the variance in rent. However, the situation in Tianjin’s tallest buildings, consisting of those over 40 stories, was clearer: 78% of rent differences within a building could be explained by these factors:

• High zone spaces rented for 20% more than low zone spaces. In a taller building, the premium commanded by a better view is worth more.
• The landmark effect. Grade A commanded 39% more. A high quality building might matter more in Tianjin if the building is prominent and visible as a landmark. This also showed in a location effect: a Nanjing Road city-center location was worth 9% more, all else being equal.

Steven McCord is Head of Research, North China for JLL and Head of Retail Research, Asia.