New Study Examines How Walkability Impacts Property Value, NOI and Investment Returns
How easily can you walk from your workplace to the gym, grocery store or favorite restaurant? The answer to that question helps determine what property professionals call a building’s ‘walkability’ -- a measure that many tenants say figures prominently in leasing decisions.
But less clear is the effect of walkability on property value and ROI, the subject of a new study by Dr. Gary Pivo, professor of planning and natural resources and senior fellow at the University of Arizona, and Dr. Jeffrey Fisher, professor of real estate and director of the Benecki Center for Real Estate Studies at Indiana University.
Dr. Pivo and Dr. Fisher pulled real estate data going back a decade from the National Council of Real Estate Investment Fiduciaries (NCREIF) and obtained walkability ratings for nearly 11,000 buildings using Walk Score, an online program that assigns points based on a building’s proximity to amenities.
They isolated the walkability variable of each building and examined how it impacted property value and investment returns. Their results confirmed some early assumptions, but also revealed a few surprises.
See the study.
For each of the property types analyzed -- office, retail, multifamily and industrial -- higher walkability scores equated to higher overall property values and net operating incomes. Comparing properties with a Walk Score of 80, defined as “very walkable” on the Walk Score web site, to properties with a score of 20 (“car-dependent”), the study found that the walkable properties were 29 percent to 49 percent more valuable and generated 34 percent to 71 percent more NOI per square foot.
The positive correlation between walkability and property value and NOI was expected, Dr. Pivo and Dr. Fisher said in the study. According to Dr. Pivo, the premiums suggest higher rents, occupancy and general market demand for walkable properties.
“The study demonstrates that walkability has been an important feature in creating value over the last 10 years,” he said.
Yet, the study found that ROI results were a mixed bag. Walkable office properties appreciated faster and generated 2.3 percent higher total annual investment returns than less walkable offices. But walkable retail and multifamily properties actually had lower annual returns than auto-oriented properties (by 3.7 percent and 1.2 percent, respectively.) Not surprisingly, walkability had no effect on the ROI of industrial properties.
According to Dr. Pivo, the lower returns, a combination of slower appreciation and lower cap rates, do not mean that walkable retail and multifamily properties are less attractive investments compared with properties in those categories with lower walkability scores. Actually, he said, they are very good investments -- but perhaps not quite as good as optimistic investors had hoped.
“The fact that retail and multifamily are able to generate higher income indicates that they have the potential to generate returns as good as or better than less walkable properties,” he said. “Investors just have to a be a little cautious in how much they pay.”
The returns suggest a “strong interest going forward,” he said, “but maybe not as strong as people in the past have anticipated.”
The numbers may have been affected by increased demand for auto-oriented retail (such as big-box) and cheaper, less walkable apartments over the past decade, the study pointed out, especially as housing markets became overheated. That would have made returns on walkable properties comparatively smaller.
One thing the study did not measure was the profitability of walkable properties for developers, although Dr. Pivo said it was likely that a positive correlation exists.
“All these different property types generate higher market value once they’ve completed and are stabilized,” he said. “Walkable developments may well be more profitable so long as the cost of development doesn’t exhaust those premiums.”