The Responsibility Premium in Commercial Real Estate

1. The Responsibility Premium in Commercial Real Estate Gary Pivo, University of Arizona Jeff Fisher, Indiana University

2. Motivation and Study Question Interest in Socially Responsible Investing and Corporate Sustainability/Social Responsibility is moving into the property sector 85% of US investors and developers surveyed (2008) would increase allocations to RPI if it met their risk/return criteria But they’re concerned that financial return could be an obstacle So, does RPI harm values and returns? Pivo/Fisher - The Responsibility Premium

3. Papers and Findings • “The Walkability Premium in Commercial Real Estate Investments,” Real Estate Economics (in 2nd round review) • “Income, Value and Returns in Socially Responsible Office Investments," Real Estate Research (in 2nd round review) • Findings • There has been a Responsibility Value Premium in offices, apartments and retail • It has been caused by higher NOIs and/or lower cap rates • Higher NOI was from higher rents, occupancy, and/or lower expenses • RPI has been neutral for total investor returns • Developers might earn superior profits IF extra costs don’t exhaust value premiums Pivo/Fisher - The Responsibility Premium

4. Types of RPI Studied“Addressing social and environmental risks, issues, and opportunities in the course of profitable real estate investing”(see Pivo, Bldg Rsch & Info, 2008) Energy Star Transit Oriented Urban Regeneration Walkable Pivo/Fisher - The Responsibility Premium

5. Data Financial: NCREIF Walkability: Front Seat/Walk Score Energy, Transit, Regeneration: Federal Controls: NCREIF, Federal, Other Pivo/Fisher - The Responsibility Premium

6. RPI Variables Economic Controls Building Quality Controls Tax Rate Control Accessibility Controls Regional Dummies Pivo/Fisher - The Responsibility Premium

7. Positive or Neutral Effects on Market Value Positive Neutral Pivo/Fisher - The Responsibility Premium

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9. RPI Variable Security Control Transit Control State Control Pivo/Fisher - The Responsibility Premium

10. Neutral Positive Pivo/Fisher - The Responsibility Premium

11. Increase in MV was larger than increase in NOI Because Cap Rates for RPI properties were Lower Pivo/Fisher - The Responsibility Premium

12. The same occurred with other properties And it worked in reverse as well Pivo/Fisher - The Responsibility Premium

13. Effect of RPI Status on TOTAL RETURNS was NEUTRAL Except for Suburban Regeneration Pivo/Fisher - The Responsibility Premium

14. Other Points of Interest • Energy Star • rents were +5% (v. 7-12% by 3 others teams) • Cap rates were -0.5% (same as Miller et al.) • All the higher transit value was from lower cap rates; none was from higher NOI. Higher Energy Star and RegenCBD value were from lower cap rates, higher rents and higher occupancy. Pivo/Fisher - The Responsibility Premium

15. Robustness Checks By region – similar or stronger results By value – stronger effect for higher value properties; is walkability a superior good? By regional walkability – stronger effect in less walkable regions Random effects panel regression – very similar to general multiple regression Replaced OCC_CBSA with regional NCREIF return indices – same results Pivo/Fisher - The Responsibility Premium

16. Conclusions There has been an RPI Value Premium driven by higher NOI and lower cap rates The premium was priced inbefore the study period and investor returns were mostly neutral RPI did not dilute returnsfor investors (except REGENSU) RPI Development Profits may have been superior from properties worth 7-10% more IF extra costs did not exhaust the premium Open Questions: Are development costs higher? Is there an opportunity for extra development profits by exploiting a disequilibrium? Future Work Plans: Taxes, Crime, Transit, Costs Pivo/Fisher - The Responsibility Premium