The Value of Mixing Uses: An Empirical Analysis of Mixed-Use Developments in Boston, MA
By Jason A. Tilley
Thesis Advisor: David Geltner, Professor of Real Estate Finance, Department of Urban Studies and Planning and Center for Real Estate
Modern mixed-use development has gained significant popularity since its conceptual introduction in the 1960s. Numerous benefits and risks have been elaborated on throughout the literature, but even today little empirical evidence exists to support these suppositions. Additionally, major data providers to the real estate industry, such as NCREIF, NAREIT, RCA, and CoStar, do not currently provide comprehensive data that identifies mixed-use developments. As such, financial analysis associated with mixed-use developments often segregates the project into its constituent uses and evaluates each use’s performance individually, without much consideration, if any, for potential synergies.
This study creates a database that allows for evaluation of transaction prices against different use-mixes for Boston, Massachusetts. We analyze this data for a better understanding of how and where premiums exist in this market, and to confirm the overall validity of our approach so that the methodology can be expanded to other markets. With over 2,200 commercial property transactions from Boston, Massachusetts in the database, we conclude the following: First – location matters, and better amenitized neighborhoods (i.e. mixed-use neighborhoods) are well correlated with higher property values. Second – value in mixed-use buildings is likely derived from higher density and/or lease-up speed rather than operational premiums (e.g. higher NOI or lower perceived risk). Third – larger master-planned, mixed-use developments with 3 or more uses tend to be located in less amenitized (i.e. less desirable) locations, and benefits associated with the mix of uses provided is insufficient to completely overcome the negative externalities of the general location. As such, these developments typically underperform against the general market.