Can we quantify architecture's impact on building value?
What We Did
We partnered with Dr. Christian Redfearn, director of Graduate Real Estate Programs at University of Southern California’s Sol Price School of Public Policy, to conduct a statistical analysis to test whether a building’s architect has an effect on its market rental rate. We tested this by comparing buildings designed by “premium” architecture firms (defined as those listed in Architect magazine’s Top 100, whose criteria for selection include design awards) with the market as a whole. We conducted the analysis using data on 8,552 properties extracted from the CoStar database in June 2011. Our dataset included properties in the following key US metropolitan areas: Atlanta, Austin, Baltimore, Chicago, Dallas/Fort Worth, Houston, Los Angeles and Inland Empire, San Francisco Bay Area, and Washington DC. Control variables included project developer, project submarket, building size, height, class, age, parking ratio, LEED/Energy Star rating, and basic amenities.
Clients and architects often consider the value of design to be intangible, as its direct effect on asset pricing is difficult to quantify. Many factors determine rental rates, including location, operating efficiency, amenities, and tenant profiles. Rental rates are also sensitive to the supply-side economics of real estate. Nevertheless, real estate economists have published studies on the drivers of value in real estate, including tangible factors such as energy efficiency and intangible factors such as design. This research contributes to the academic dialogue on the drivers of real estate value, and tests for evidence of the correlation between design and monetary value.
Results were compelling, suggesting that buildings designed by top architecture firms exhibit a rent premium of 3.8% on average across the full observed sample of buildings. Our analysis shows a 99% level of confidence for the effect, making it statistically significant. The design premium is also independent of statistically significant effects correlated to properties developed by top developers (3.6%) and properties that received a LEED or Energy Star rating (1.8%).
These results, however, are unstable when looking at each Metropolitan Statistical Area (MSA) in isolation. While a stable premium exists based on building location and class, effects for architect, developer, LEED/Energy Star rating, age, size, height, and parking are all unstable. Some markets exhibit a design premium while others do not—in particular, the Los Angeles market exhibits a stable premium for Class A office buildings designed by premium architects.
What This Means
Quantifying design’s value is within reach. Our results show some preliminary evidence of a correlation between building designer and rental rates, suggesting that the market does reward the choice of top design firms when setting rents.
This value is hard to quantify directly. We conducted our analysis by testing a “null hypothesis”; in this case, that buildings designed by top architecture firms do not fetch higher rents. We disproved this hypothesis—suggesting that there is a value—but more analysis is necessary to quantify that value.
Geography complicates the design-value equation. The premium we observed was not true in all submarkets we studied, suggesting that the value of a top architect is stronger in certain markets and that certain factors require more study.
Multi-tenant commercial office rents are set within their immediate market context and can vary by block as well as by lease within a building. A design premium that holds up with a greater level of granularity on location is still illusive. Rent premiums are also susceptible to the business cycle, and designers and developers should undertake cross-sectional analysis during phases of the business cycle. We continue to investigate the value-add of great design, drawing on the proprietary information we continue to gather through surveys and project work, as well as market and building data.
John Adams, Chris Jerde, Kimberly Kelly, Professor Christian Redfearn (USC)