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Effects Of Walkability On Property Values And Investment Returns

Studies effects of walkability on the market value and annual investment returns of office, apartment, retail and industrial properties over the past decade

Abstract

The purpose of this study was to examine 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. It is of particular concern to developers, investors and others interested in sustainable and responsible property investing because of its potential social and environmental benefits. We used data from the National Council of Real Estate Investment Fiduciaries (NCREIF) and Walk Score to examine the effects of walkability on the market value and annual investment returns of nearly 11,000 office, apartment, retail and industrial properties over the past decade in the USA. We find that, all else being equal, the benefits of walkability are capitalized into office, retail, apartment and industrial property values with more walkable sites commanding higher property values. On a 100 point scale, a 10 point increase in walkability increases property values by 5 to 8 percent, depending on property type. We also find that walkability is associated with lower cap rates and higher incomes, suggesting that the higher values are caused by both higher incomes and expectations of less risk, greater income growth or slower depreciation. Walkability only had a positive effect on historical investment returns for offices. It negatively affected returns for retail and apartments and had no effect on industrial property. The negative effect on retail was mostly due to slower appreciation, suggesting the price premium may have been too high and was adjusting during the study period, so walkable retail could earn a market return going forward. For apartments the negative effect on total return was caused by lower income returns (lower cap rate), suggesting either that they were considered less risky, which could justify the lower total returns, or greater income and price appreciation was anticipated than materialized. All walkable property types generated higher income and therefore have the potential to generate returns as good as or better than less walkable properties, as long as they are priced correctly. Moreover, developers should be willing to develop more walkable properties as long as they do not have to pay too high a premium for more walkable locations and related development expenses.