C3. Commercial property value and better urban design
Density, mix and value
Aims and method:
Investigates how the benefits of a walkable neighbourhood are reflected in the real estate market by examining the economic values of urban environmental factors supporting walking activities. Property values were used as a proxy measure for economic value in King County, Washington (USA) and analysed in relation to land use characteristics that have been known to correlate with walking at the neighbourhood scale. Hedonic models were employed to explore the relationships.
Key findings:
· The positive association of higher development density with the value of single family residential properties suggested that high development density might increase surrounding property values.
· The pedestrian infrastructure and land use mix contributed significantly to increases in multi-family residential rental property values.
· Higher development density with higher street and sidewalk coverage were also favoured by retail service uses.
· In relation to land use mix, mixing retail service uses and multi-family residential rental uses helped make neighbourhoods more attractive.
Reference:
Sohn, D. W., Moudon, A. V., & Lee, J. (2012). The economic value of walkable neighborhoods. Urban Design International, 17(2), 115-128.
Public transport connectivity and commercial value
Aims and method:
Explores the capitalisation effects of proximity to good public transport, both light rail and commuter rail. Hedonic price models are used to test the commercial land values in the fast growing Santa Clara County of California (USA).
Key findings:
· Substantial capitalisation benefits were found in the order of 23% for a typical commercial parcel near a light rail transit stop
· And more than 120% for commercial land in a business district and within 0.25 miles of a commuter rail station
Reference:
Cervero, R., & Duncan, M. (2002). Transit's value-added effects: light and commuter rail services and commercial land values. Transportation Research Record: Journal of the Transportation Research Board, (1805), 8-15.
The walkability premium in commercial investments
Aims and method:
Examines the effects of walkability on property values and investment returns in the commercial real estate sector. Uses data from the National Council of Real Estate Investment Fiduciaries and Walk Score to examine the effects of walkability on the market value and investment returns of more than 4,200 office, apartment, retail and industrial properties from 2001 to 2008 in the USA.
Key findings:
· All else being equal, the benefits of greater walkability were capitalised into higher office, retail and residential values
· Walkability has no effect in the industrial property sector.
· On a 100-point scale, a 10-point increase in walkability increased values by 1–9%, depending on property type.
· They also found that walkability was associated with lower cap rates and higher incomes, suggesting it has been favoured in both the capital asset and building space markets.
· Walkable property types have the potential to generate returns as good as or better than less walkable properties, as long as they are priced correctly.
· Developers should be willing to develop more walkable properties as long as any additional cost for more walkable locations and related development expenses do not exhaust the walkability premium.
Reference:
Pivo, G., & Fisher, J. D. (2011). The walkability premium in commercial real estate investments. Real Estate Economics, 39(2), 185-219.
http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6229.2010.00296.x/full
Exterior design quality and office rents
Aims and method:
Investigates the impact of quality-led design on the value of commercial office properties in the urban core of Belfast (UK). Uses Hedonic Price Modelling (HPM) to assess the contribution that high quality urban design makes to office rents. In doing so a set of urban design variables were specified and each variable was estimated for a unique dataset of property transactions.
Key findings:
· High design quality at various levels commanded a price premium and even in a depressed economic environment, quality sells.
· Tenants are willing to pay to be situated in a building of higher exterior design quality.
Reference:
Nase, I., Berry, J., & Adair, A. (2011). Urban design quality and downtown office rents: A case study of Belfast City Centre (No. eres2011-158). European Real Estate Society (ERES).
https://eres.architexturez.net/system/files/pdf/eres2011_158.content.pdf
Real estate value and quality design in commercial office properties
Aims and method:
Assesses the impact of urban design quality on the real estate value of commercial office property in Belfast (UK). Uses a dataset of 279 Belfast City Centre office properties rented during the period 1995‐2009 and employs regression analysis to estimate a hedonic pricing model based on a composite range of variables.
Key findings:
· Higher design quality specifications in the three levels (interior, exterior and urban scale) can generate rent premiums.
· Aspects of quality design that include connectivity and building facade distinctiveness enhance corporate image
· Material quality appropriateness adds to real estate value whereas the lack of preference for tall buildings and high‐end interior quality specifications in historic cores reflects market reactions to economic trends.
Reference:
Nase, I., Berry, J., & Adair, A. (2016). Real estate value and quality design in commercial office properties. Journal of European Real Estate Research, 6(1), 48-62.
http://emeraldinsight.com/doi/pdfplus/10.1108/17539261311312988
'Iconic design’ as deadweight loss
Aims and method:
Examines the relationship between the employment of ‘trophy architects’ and the planning system. It employs a hedonic approach on a sample of offices sold between 1998 and 2011 in London designed by trophy architects (those who had won a major lifetime achievement award).
Key findings:
· Much of London is covered by absolute height restrictions but outside these areas the study shows that for a given site a building designed by a trophy architect was more valuable
· This arises largely because these architects seem able to squeeze more space on to a given site (an extra 19 stories), increasing the site value by an estimated 130%.
· While these effects of trophy architects could be windfall gains to developers, the authors suggest a more likely interpretation is that they represent the additional but difficult to measure returns demanded for the extra risk and delays imposed by using a trophy architect to try to game the system, hence a form of compliance cost and a deadweight loss associated with England’s planning system.
Reference:
Cheshire, P. & Dericks, G. (2014) 'Iconic design' as deadweight loss: rent acquisition by design in the constrained London office market. SERC Discussion Papers, SERCDP0154. Spatial Economics Research Centre (SERC), London School of Economics and Political Science, London, UK.
Quality vs. depreciation in the office property market
Aims and method:
Explores the relationship between quality and depreciation in the London office market, where quality was largely a matter of building configuration, but also included external design factors. The research was based on an intensive questioning of real estate professionals, backed up by a survey of occupiers.
Key findings:
· There is a positive relationship between building quality and return on investment.
· Occupiers' preferences can be built into design without necessarily impacting on cost
· Better investment returns are delivered by the resistance of rental values to depreciation delivered through higher design quality.
Reference:
Baum, A. (1993). Quality, depreciation, and property performance. Journal of Real Estate Research, 8(4), 541-565.
http://aresjournals.org/doi/abs/10.5555/rees.8.4.04248622350n1762?code=ares-site
The economics of office architecture
Aims and method:
A preliminary attempt to evaluate the contribution of architectural quality to the value of buildings. Uses disaggregate cross-sectional and longitudinal operating performance and amenity data from a set of 102 class A office buildings in Boston and Cambridge, Massachusetts (USA). Data on design quality for the set of buildings was provided by a detailed evaluation of each structure by a panel of architects.
Key findings:
· Design quality influences both rent and vacancy behaviour.
· Its effect, however, is dependent on characteristics both of the production and operating cost functions and of tenant demand for the design vs. non-design amenity.
· Results confirm a strong influence of design on rents; structures rated in the top 20% for design quality were predicted to extract almost 22% higher rents than those rated in the bottom 20%.
Reference:
Vandell, K. D., & Lane, J. S. (1989). The economics of architecture and urban design: some preliminary findings. Real Estate Economics, 17(2), 235-260.
http://onlinelibrary.wiley.com/doi/10.1111/1540-6229.00489/full
Good architecture and the market
Aims and method:
Examines the extent to which architecture recognised as ‘good’ in the Chicago (USA) commercial office market also carries a price premium. Data was obtained for 139 downtown office buildings and entered into a hedonic price model that compared price data with data on the quality of the architectural design as measured by, the award of national or local landmark status (in the case of historic buildings) or by an award of the Chicago American Institute of Architects, in the case of contemporary buildings. The model controlled for factors such as distance to the CBD and other locational factors.
Key findings:
· Tenants were willing to pay a considerable premium to be in new architecturally significant office building
· No comparable benefits were associated with old office buildings that expressed recognised aesthetic excellence
Reference:
Hough, D., & Kratz, C. (1983). Can “Good” Architecture Meet the Market Test?. Journal of Urban Economics, 14, 40-54.
Quality and retail property performance
Aims and method:
Considers whether (and if so, how) quality in property development (excluding site factors) is likely to lead to high returns. The paper is based on discussion with UK experts in the field supplemented by literature review.
Key findings:
· High quality design leads to better returns in retail development.
· Design factors – especially plan layout – are more important than durability and other factors related directly to cost.
· There is no guarantee that expenditure will lead to high-quality external appearance or plan layout, and cannot therefore guarantee higher returns
· For income return and capital return through rental growth, configuration is the single most important factor.
· For capital return through yield, external appearance also becomes important.
Reference:
Baum, A. (1994). Quality and property performance. Journal of Property Valuation and Investment, 12(1), 31-46.
http://www.emeraldinsight.com/doi/abs/10.1108/14635789410050494
Urban greenery, retail experience and spend
Aims and method:
Explores the restorative effects of urban greening on the experience of consumers in shopping environments. A multi-study research program on the effects of urban greening on consumer behaviour is reviewed.
Key findings:
· The evidence shows that commercial activities and urban greening are not antagonistic but mutually reinforcing.
· Trees were associated with higher ratings of amenity and visual quality across the studies, with positive inferences made about the settings.
· Patronage behaviour was found to be significantly more positive in the ‘with trees’ conditions as compared to the ‘without trees’ ones: responses to settings without trees were concentrated at the lower end of each of the patronage variable’s values, while streetscapes with trees generated higher value responses.
· Trees appeared to be consistently associated with higher price points. When standardised across all product categories and scenarios margin for the presence of trees was 12% for large cities and 9% for small cities.
Reference:
Joye, Y., Willems, K., Brengman, M., & Wolf, K. (2010). The effects of urban retail greenery on consumer experience: Reviewing the evidence from a restorative perspective. Urban Forestry & Urban Greening, 9(1), 57-64.
http://www.sciencedirect.com/science/article/pii/S161886670900065X
Urban greenery and retail valuations
Aims and method:
This research evaluated the role of trees in consumer/environment interactions. Psychometric and econometric survey methods were employed in a range of large US cities to assess consumer response to streetscape conditions in revitalising inner-city business districts. Three hypothetical scenarios of neighbourhood business district streetscapes were presented using composites of photographic images and a plan view sketch. The three scenarios differed with respect to the quantity, location, and complexity of vegetation.
Key findings:
· Higher price valuations are mediated by psychological inferences of district character and product quality
· While many conditions contribute to perceptions by consumers of attractive, desirable shopping settings, this study suggests that urban greenery (trees) should be a central element of retail place.
Reference:
Wolf, K. (2003) "Public response to the urban forest in inner-city business districts." Journal of Arboriculture. 29(3): 117-126
http://joa.isa-arbor.com/request.asp?JournalID=1&ArticleID=85&volume=29&issue=3&Type=1
High street retail properties and quality of design
Aims and method:
Investigates the relationship between urban design quality and the real estate value of high street retail properties. The study uses a dataset of 301 Belfast City Centre retail transactions during the period 1994-2009. Ordinary least squares (OLS) regression analysis is used to estimate a hedonic pricing model that utilises a composite range of variables. These variables were designed employing quantitative and qualitative approaches in order to strengthen the value of the empirical research.
Key findings:
· Aspects of quality design such as connectivity, frontage continuity and variety, material quality and massing appropriateness add to real estate value from 5 to 25%.
· These findings supplement those on sector-specific value determinants that emphasise the high impact of location, tenant characteristic and Zone-A price calculations.
Reference:
Nase, I., Berry, J., & Adair, A. (2013). Hedonic modelling of high street retail properties: a quality design perspective. Journal of Property Investment & Finance, 31(2), 160-178.
http://www.emeraldinsight.com/doi/abs/10.1108/14635781311302582
The value of public art on buildings
Aims and method:
Ascertains the extent to which the provision of public art brings financial and other benefits to occupiers and investors in property. The study involved interviews with occupiers, agents and investors in property and a nation-wide survey of local authorities in England.
Key findings:
· Some 62% of occupiers recognised that the contribution which public art made to their building was significant
· Notably 64% of occupiers either agreed or agreed strongly that public art made their building distinctive.
· While public art provision clearly could not be correlated with rental growth prospects, it was seen as a contributing factor in securing quality tenants and minimising void rental periods.
Reference:
Roberts, M. (1995). For Art's Sake: Public art, planning policies and the benefits for commercial property. Planning Practice & Research, 10(2), 189-198.
http://www.tandfonline.com/doi/abs/10.1080/02697459550036702
Signature architecture and value
Aims and method:
Investigates whether commercial offices designed by `signature architects' in the USA achieve rental premiums compared with commercial offices designed by nonsignature architects. Focusing on buildings designed by winners of the Pritzker Prize and the Gold Medal awarded by the American Institute of Architects, a sample of commercial office buildings is created designed by signature architects, drawing on CoStar's comprehensive national database. A combination of a hedonic regression model and a logit model is then used to estimate the various price determinants.
Key findings:
· The hedonic analysis suggested that, compared with buildings in the same submarket, office buildings designed by signature architects have rents that are 5% to 7% higher, and sell for prices 17% higher.
· The results from the second-stage logit estimation suggest a rental premium of approximately 5% for signature architects in large architectural practices, while the sales-price premium identified in the first stage hedonic regression was not confirmed.
Reference:
Fuerst, F., McAllister, P., & Murray, C. (2011). Designer buildings: estimating the economic value of ‘signature’ architecture. Environment and Planning A, 43, 166-184.