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The Responsibility Premium in Commercial Real Estate. Gary Pivo, University of Arizona Jeff Fisher, Indiana University. Motivation and Study Question. Interest in Socially Responsible Investing and Corporate Sustainability/Social Responsibility is moving into the property sector

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the responsibility premium in commercial real estate

The Responsibility Premium in Commercial Real Estate

Gary Pivo, University of Arizona

Jeff Fisher, Indiana University

motivation and study question
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

papers and findings
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


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


Pivo/Fisher - The Responsibility Premium


Financial: NCREIF

Walkability: Front Seat/Walk Score

Energy, Transit, Regeneration: Federal

Controls: NCREIF, Federal, Other

Pivo/Fisher - The Responsibility Premium


RPI Variables

Economic Controls

Building Quality Controls

Tax Rate Control

Accessibility Controls

Regional Dummies

Pivo/Fisher - The Responsibility Premium


Positive or Neutral Effects on Market Value



Pivo/Fisher - The Responsibility Premium


RPI Variable

Security Control

Transit Control

State Control

Pivo/Fisher - The Responsibility Premium




Pivo/Fisher - The Responsibility Premium


Increase in MV was larger than increase in NOI

Because Cap Rates for RPI properties were Lower

Pivo/Fisher - The Responsibility Premium


The same occurred with other properties

And it worked in reverse as well

Pivo/Fisher - The Responsibility Premium


Effect of RPI Status on TOTAL RETURNS was NEUTRAL

Except for Suburban Regeneration

Pivo/Fisher - The Responsibility Premium

other points of interest
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

robustness checks
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


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