With the economic rationale for the development of sustainable buildings based almost entirely on anecdotal evidence, real estate developers and property investors are uncertain about how far to go in implementing environmental investments. However, solid academic evidence is changing the debate. Dr. Nils Kok discusses his research on the topic in "Doing Well by Doing Good: Green Office Buildings." This widely cited study provides the first systematic analysis of the impact of LEED and ENERGY STAR certification on the sale prices and rental rates of U.S. commercial office buildings.
1. Doing Well by Doing Good:
Green Office Buildings
Nils Kok
UC Berkeley
Maastricht University
John M. Quigley
UC Berkeley
Piet Eichholtz
Maastricht University
San Diego
February 2010
2.
3. Climate change and the built environment
The macro and micro economic perspective
1. Climate change and its consequences are a global (economic) threat
Carbon emissions and buildings are closely related
At least 30 percent of global greenhouse gas emissions stem from
buildings (construction and subsequent economic life)
Built environment offers largest potential for greenhouse gas abatement
McKinsey cost abatement curve
2. Energy costs are single largest expense in provision of office space
30 percent of operating expenses
10 percent of total housing costs
Salience can only increase with rising energy prices
3. Awareness is growing and the importance of “green building”
practices has increased…
7. What about the importance in the marketplace?
Top-25 “green” commercial office markets
8. The value case for eco-efficiency in real estate
Costs versus revenues in ‘green’ buildings
A higher initial outlay…
Not clear how much higher (0 – 20%)
‘Smarter’ building managers/software
… may be compensated by ‘green’ value drivers
Cost savings
Energy savings (up to 35%)
Emission reduction
Increased rents
Reputation effects
Improved indoor air quality
Increased economic lives, reduced depreciation lower risk (e.g. less
variation in occupancy)
Case studies on the economic implications
Focus often on new buildings, but annual new construction is only
1%-3% of total stock
Results are hard to generalize
9. This study: economic effects of ‘green’ label
U.S. property sector offers laboratory
10. “Green” buildings
Two programs: Energy Star (EPA) and LEED (USGBC)
Dataset of existing sustainable office properties (U.S.)
EPAs Energy Star for Commercial Buildings (1995)
Efficiency in source energy use is in top quarter relative to CBECS
Standardized for building use (occupancy, hours) and climate
Certified by professional engineer
Based on real energy consumption (at least one year of bills)
Our sample: 2,759 Energy Star-certified buildings
USGBCs Leadership in Energy and Environmental Design (1999)
Scoring systems based on 6 components of “sustainability”
Energy efficiency one component
Various systems and versions (eg. NC, EB, O&M, ...)
Based on design stage (and now verified after construction)
Our sample: 716 LEED-certified buildings
11.
12. Defining conventional comparables
Systematic match on location
Based upon longitude and latitude, we use GIS to identify all
conventional office buildings in a 0.25 mile radius
13. Example: 401 W A Street, San Diego
Energy Star certified (‘01, ‘02, ‘04, ‘08, ‘09), LEED Gold
401 W A St
Columbia Center
This copyrighted report contains research licensed to Maastricht University - 382753.
14. Example: 50 Hurt Plaza, Atlanta
Energy Star certified, LEED Gold
15. Clusters of green and control buildings
Minimum of one control building per cluster
Chicago, IL Houston, TX Columbus, OH
16. Defining conventional comparables
Systematic match on location
Final sample
Rental sample
1,943 green buildings
21,395 control buildings
Transaction sample
744 green buildings
6,065 control buildings
To further control for differences in quality, we estimate a propensity
score for each building (Rosenbaum and Rubin, 1983)
Logit model including all hedonic characteristics
17. Descriptives: green sample vs. control sample
Green buildings are larger and younger
Propensity score weighting substantially reduces differences
18. Methodology
How to correct for differences in location and quality?
Methodology: standard valuation framework
Rin is the rent, effective rent or transaction price per sq.ft.
Xi is a vector of hedonic characteristics
Size, age, renovation, class, amenities, public transport, …
Percent change in employment in service sector (CBSA) to control for
regional variation in demand for office space
Cluster cn dummies to control for location – 1,943 (744) separate
dummies in the rental (transaction) sample
21. What explains the green premium?
Signalling value…or a better building
The variation in the premium for green buildings:
Energy characteristics of the building
Sustainability characteristics of the buildings
“Label premium”
For 209 LEED-rated buildings, we have information on:
Registration versus certification
Standardized numerical rating (37 – 100)
Score achieved in six components of LEED evaluation
For 1,719 Energy Star-rated buildings, we have information on:
Source/site energy consumption
Energy bill
Local climate (heating and cooling degree days)
22. Detailed information on LEED-rated buildings
Standardized indices of buildings’ sustainability
23. Explaining the premium for LEED rated buildings
Certification score is important determinant of rent increment
LEED-certified, score 40: effective rent of 2 percent higher than
otherwise identical, registered building
LEED-certified, score 60: effective rent of 20 percent higher
24. Information on Energy Star-rated buildings
Emissions of efficient buildings are still substantial…
Average emission of a building in our sample: 4,326 tons of CO2
750 cars, 9,000 barrels of oil, …
Energy Star-rated buildings emit at least a quarter less carbon as
compared to conventional office buildings
25. Explaining the Energy Star increment
Energy efficiency is reflected in “green” price increment
A $1 saving in energy costs is associated with a 4 percent premium
in market capitalization
At the point of means ($245/sq.ft.), this implies a cap rate of 10
percent
26. Some first conclusions
Eco-investment real estate sector is not only ‘doing good’
Ceteris paribus, green buildings
1. Have higher rents by 2%
2. Have higher effective rents by 6%
3. Have higher selling prices by 13%
The green increment is systematically related to the underlying
characteristics of energy efficiency or “sustainability”
Market seems to be relatively efficient in pricing these aspect
LEED and Energy Star measure somewhat different aspects of
“sustainability” and complement each other
27. Market dynamics and green buildings (I)
2007 – 2009 was a painful period…
Office rents –30%
Vacancy rate +40%
Unemployment +115%
28. Market dynamics and green buildings (II)
2007 – 2009 was a painful period…
Office rents –29%
Vacancy rate +50%
Unemployment +111%
29. But... “green” office space flourished
Fraction of certified “green” space in 150 CBSAs
30. Dynamics of green building
Substantial increase in rated space in a contracting economy
We investigate the differences in rental developments in rated space
and otherwise comparable space
8,182 observations as of September 2007
694 rated buildings and 7,488 nearby control buildings
Rents, occupancy rates, effective rents
Same sample as of October 2009
Some control buildings were converted to “green” during the sample
period
Developments in rents, occupancy rate, effective rents
31. The returns to green buildings
“Brown-green” is the biggest loser…
33. Conclusions and implications
“Green” is getting mainstream
Increased awareness of global warming and the role of the real
estate sector have increased attention upon “green building”
Demand-pull is necessary to reduce carbon impact of built environment
Voluntary labels can help in creating transparency in energy
efficiency and sustainability
Energy efficient and sustainable office space is getting mainstream
This may have economic implications for investors, tenants, and
policymakers
Buildings certified by Energy Star or LEED command higher rents
and prices in the marketplace…
The “green premium” has slightly decreased during the crisis
Private market incorporates signal of energy efficiency and/or
sustainability
35. Does this evidence hold for Europe as well…?
Tentative evidence points in a similar direction
UK study
BREEAM-labeled offices (1,000 buildings)
IPD financial data
Outcome: 88 matches…
Institutional property investors have not (yet) embraced BREEAM
First results
Difficult to control for quality differences
Similar economic implications for rent and value
Cap rates for BREEAM-labeled buildings seem to be lower
More later this year…
…but what about other labeling systems?
36. EU Energy Performance of Buildings Directive
Originated January 2003, revised December 2009
“Member states shall ensure
that, when buildings are
constructed, sold or rented
out, an energy performance
certificate is made available
by the owner to the
prospective buyer or
tenant”
37.
38. Study value of EPCs in Dutch housing market
The “greener” the better…
The EPC seems to be effective: we document a price premium that
varies with the label outcome, which is driven for a large part by future
energy savings