Pivo and Fisher on the Walkability Premium for Commercial Properties

Edited thanks to thoughtful commenter Derek Pokora:

The full article in per can be downloaded from Pivo’s academic page at the University of Arizona.

I always follow the work of Gary Pivo, and he and Jeffrey Fisher have a new manuscript in this (excellent) edition of Real Estate Economics. Because this is a scholarly publication, you have to pay for access, unfortunately. I will discuss it extensively here for those who can’t go read it themselves.

Here is the citation:

Pivo, G., & Fisher, J. D. (2010). The walkability premium in commercial real estate investments. Real Estate Economics. doi:10.1111/j.1540-6229.2010.00296.x

From the abstract:

This article examines the effects of walkability on property values and investment returns. Walkability is the degree to which an area within walking distance of a property encourages walking for recreational or functional purposes. We use 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 United States. We found that, all else being equal, the benefits of greater walkability were capitalized into higher office, retail and apartment values. We found no effect on industrial properties. On a 100-point scale, a 10-point increase in walkability increased values by 1–9%, depending on property type. We also found that walkability was associated with lower cap rates and higher incomes, suggesting it has been favored in both the capital asset and building space markets. Walkability had no significant effect on historical total investment returns. All 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.

The use regional, neighborhood, and building variables in their models. Among their building characteristics include: number of stories, a square of that, the property tax, and whether the property is within a half mile of rail transit station. For neighborhood characteristics, they have property crime rates, population density and Walk Scores. They also use a bunch of regional variables.

One of the nice parts of the paper is their discussion of the Walk Score and what it measures.

Ohhhhhhh how I wish they had had parking availability for this study. A walking premium holds with theory. But theory would also suggest that the sorts of designs that accommodate both parking and walking would be even more productive for the developer and the tenants. The big box world of large surface lots has become uninteresting to a lot of urban consumers. But think about all the urban Trader Joe’s out there that have four stories of parking underneath or above in addition to their street-level storefront. Those are the properties that I bet get a nice value boost, and there’s no way to glean that from their data or model.

The difference is huge for those who argue that walkable developments “take cars off the road.” These developments may do so, but they may also simply generate more trips overall–and that’s certainly not a bad thing from the developer’s viewpoint.

Pivo and Fisher find that apartment properties had little premium value associated with walking–rather, the major boost came to commercial property, and in particular, retail property. They argue that it may be that the Walk Score, reflecting multiple things, is also capturing what may be negative effects from proximity to busy commercial centers (noise, lack of privacy, etc). It could be that–Lord knows, plenty of the people who advocate loudly for urban living completely discount its inconveniences.

But I strongly suspect one of the reasons they don’t see more of an effect for the apartments is that there is just plain more variation in quality and individual building characteristics than they can really capture with the data they’ve got. So it’s not like there is no effect, it’s just really hard to suss here given the data and given, as they point out, the potential conflicting effects from the Walk Score.

They find a 0.18 coefficient for market value with regard to their 1/4 mile buffer, and it’s highly significant, for the rail access variable, but that variable correlates at 0.51 to the Walk Score, and they don’t really present any tests for this problem. The correlation is not the end of the world, but it’s just high enough, and it’s positive, that had I been a reviewer, I would have grouched at them to check on it more. When you are using a combined or index measure like a Walk Score, it’s important to help your reader understand how it may interact or correlate with other measures.

The proximity to transit variable tells an interesting story for urban theory. They have appreciation and income variables for outcomes, and these variables are all logged. They find, just as with the Walk Score, that rail transit access has the highest impact (all effects significant) for retail and commercial property. Retail gets a nice boost in operating income from a higher walk score and rail transit access.

However, the aggregate regressions show a positive value for appreciation and negative for income.

So what does this mean? Their interpretation, if I understand them, means that the value of the additional business you get from walking customers probably gets captured by landlords and property owners rather than businesses renting–that is, they pay higher rents for their location location location. Property owners benefit from walkability, but tenants should think twice if somebody asks them to pony up for walking improvements. It also suggests that the property tax is a good source of funding for walking improvements, given who financially benefits, even though we all know that expecting property owners to pay taxes is the equivalent of spitting on veterans and making cookies for Jane Fonda.

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