This paper makes a preliminary attempt to evaluate empirically the nature of the contribution of architectural quality to the value of buildings. An economic model is postulated that predicts equilibrium rent and vacancy behavior as a function of both design and non‐design characteristics. Vacancies are created in equilibrium as a result of search and information costs and tenant heterogeneity and are observed by the landlord as price‐inelastic demand behavior. Design quality is seen to influence both rent and vacancy behavior. Its effect, however, is dependent on characteristics both of the production and operating cost functions and of tenant demand for the design vs. non‐design amenity. An important characteristic of the design amenity is that it is not, in general, independent of the production function for non‐design amenities. The model is tested using disaggregate cross‐sectional and longitudinal operating performance and amenity data from a set of 102 class A office buildings in Boston and Cambridge. Data on design quality for the set of buildings were provided by a detailed evaluation of each structure by a panel of architects. Results confirm a strong influence of design on rents; structures rated in the top 20% for design quality were predicted to extract almost 22% higher rents than those rated in the bottom 20%. In contrast, the data showed a weak relationship between vacancy behavior and design quality. Finally, good design was shown to cost more to produce on average, but not necessarily in every case. The magnitude of the point estimates of the rent, vacancy, and construction cost effects suggest that good design may not in fact be more profitable on average, but as with a lottery, may provide a small probability of a high return to the developer.
Real Estate Economics – Wiley
Published: Jun 1, 1989
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