The Value of Design in Asset Pricing

Does design contribute to real estate value? Practicing architects are confronted with defending the value of both functional and aesthetic building needs, such as daylight, views, geometry and spatial contextuality. Real estate asset valuation models consider only the crudest elements of a building for driving asset valuation, e.g., building size, age, number of stories, etc., but these features are abstract and may may misidentify the sub-optimal differentiation that design brings. The lack of feedback and miscommunication between real estate valuation and building design often to poor design and economic outcomes. To address this miscommunication, we investigate four external architectural design features – diagonality, building curvature, setbacks, and podium extrusions – and assess their influences on real estate pricing. Our results suggest that there is a significant economic impact of certain architectural design interventions that aesthetically and functionally differentiate the building and that this topic requires further research.

Measuring the Financial Impact of Architectural Design Features

Methodology:

We studied and computed four external architectural formal features in New York City: DIAGONALITY, CURVATURE, SETBACKS and PODIUM EXTRUSIONS. We then identified and computed 826 buildings with these architectural design features in New York City. Finally we paired 3,095 building financial records with these four design features to measure the financial value of design form.

We employ a regression framework to explain transaction prices with a series of design treatment variables. We observe individual transaction events over the 2001 to 2008 period across Manhattan, New York, using transaction data provided by RCA and feature data provided by Compstak to provide fundamental hedonic variable for our pricing model.

The geographic variation of external architectural design features – diagonal intersection, curvature, setbacks and podium extrusions in Manhattan, New York.

External Architectural Design Features

Geographic Variation of External Architectural Design Features: New York City

Overlaps of Design Features

What we found:

We identified and computed 826 buildings with these architectural design features in New York City.
We paired 3,095 building financial records with these four design features to measure the financial value of design form.
We review how design features are valued already by building users and markets.
Curvature, setbacks and podium extrusions differentiate a commercial building’s financial value by 15.9 percent, -13.6 percent and 14.6 percent respectively.
Diagonality does not have a significant financial impact on transaction price for commercial properties in New York City.

What surprised us:

Although building setbacks are similar to podium extrusions, the former has a negative value impact on transaction price for commercial properties while the latter creates a value premium. We speculate that this is due to the terrace-like form for the upper portion of tall buildings: it reduces the rentable building footprint significantly and adds difficulty in floor plan layouts. Unlike buildings with podiums, buildings with setbacks lose square footage without providing enough mixed-use commercial amenities to balance the loss.

Diagonality does not have a significant impact on transaction price. Originally, we hypothesized that buildings sitting on diagonal intersections would yield a positive significant coefficient from the regression model for two main reasons. First, a diagonal intersection is likely to create additional open space, compared to other typical perpendicular intersections. There are several parks at diagonal intersections in Manhattan, such as the Greeley Square Park, Madison Square Park, Dante Park, and so forth. Second, we considered sites on a diagonal intersection as eye-catching locations in Manhattan, hence attracting some high-profile building projects. However, it is important to realize that these sites might impose unexpected limitations on building design and construction , especially constraining the footprint size.