Using a sample of Fannie Mae loans, a recent academic study finds evidence that owners of apartment buildings with certain sustainability features are less likely to default on their mortgages. The article produces a number of other results that also may be of interest.
The article was authored by Gary Pivo, of the University of Arizona, and published in the Journal of Sustainable Real Estate. The statistical techniques it uses to estimate the probability of default controlling for characteristics of the mortgages and other factors are fairly standard. If anything, the article might be criticized for the vintage of its data, some of which come from the 2000 Census.
Among the article’s basic sustainability findings are that an owner defaulting on the mortgage for a rental property is
- 32 percent less likely if the apartment building is within a mile of protected open space
- 34 percent less likely if the building is in a neighborhood with at least 16 retail stores
- 58 percent less likely if in an area where at least 30 percent of workers commute to by subway/elevated train
- 62 percent less likely if the property meets Fannie’s definition for affordability
The theory is that these features make properties more desirable to tenants, which tends to improve the property’s value and cash flow, leading to reduced chance of the owner defaulting. It’s interesting that the author treats affordability as an important component of sustainability—an attitude NAHB wishes more policymakers would adopt.
Results not characterized as sustainable in the article but still interesting are that mortgage default is
- 33 percent more likely if the apartment building is located in a principal city (a newer term that has replaced central city, generally the one-to-three most populous cities in a metropolitan area)
- less likely if the building is newer—1.6 percent less likely even if only one year newer than average.
The principal city result is not discussed in the article (possibly because it fails a rule of thumb for statistical significance by a narrow margin), but could be used to support arguments for building multifamily in the suburbs (NAHB consumer surveys also show that a relatively small share of home buyers would choose to live in a central city as their first option). Advantages of newer construction, of course, are always of interest to builders, and the result that newer apartment buildings are less likely to default could be especially useful to multifamily developers seeking loans.