"For good design, you pay now; for bad design, you pay later"--or do you?

Abstract

What is the value of architectural design on office building income? This empirical study of 296 office building located in 11 Metropolitan Statistical Areas (MSA) hopes to quantitatively determine if a plain vanilla cereal box suburban office building commands more or less net operating income than an office building with a higher level of design. Previous empirical studies have found a strong influence of design on rents but were limited in geography, building characteristics and total number of observations. In an important study by Vandell and Lane (1990), they found that good architecture commanded a premium of over 20% in office rents. Also, their study showed that good design cost more to produce on average, but not necessarily in every case. Data was gathered from a portfolio of US office buildings and consisted of building metrics and property level 2000-2005 Net Operating Income (NOI). This base data set, MSA dummy variables and architectural attribute dummy variables (created by the authors) formed the backbone of the research. Multiple log linear regression analysis was conducted to identify the economic effects of good design.

(cont.) In addition, a survey taken by 31 architects was used to capture subjective rankings on the all 296 office buildings to determine if there is a consensus as to what constitutes good design. It is hoped that these professionals, who are formally trained and are practicing in the field, are well-qualified to evaluate the design of each building. The survey results showed that the architects' responses are idiosyncratic and subjective. Not only did the individual participant's rankings show no significant relationship with one another, but also did not exhibit any relationship with actual building NOI. The empirical study found that the market paid a premium of 7.9% for buildings with non-center cores. Also, a significant 11.7-13.2% premium was paid for properties with non-rectangular and non-square shaped floor plans. Finally, buildings with 60% to 90% exterior windows commanded a substantial 10.7% premium. These results imply that better-designed buildings generate higher NOI either because the tenants are willing to pay a premium or because the operating costs of the building are less, or both.