Urban Land Magazine
by Ron Nyren
September 21, 2010
Buildings with sustainable design features may cut energy costs and have less impact on the environment than conventional buildings, but until the past few years, there has been little data about the economic benefit for their owners. Recent studies have indicated that commercial office buildings with a green rating have lower operating costs, higher occupancy rates, higher lease rates, and higher resale values. Now, there is evidence that even in the current economic downturn, the green premium holds true.
In 2007, John Quigley, a professor at the University of California at Berkeley’s Haas Real Estate Group, and Piet Eichholtz and Nils Kok of Maastricht University in the Netherlands, analyzed 694 U.S. office buildings that had either received a rating from the U.S. government’s Energy Star program or the Leadership in Energy and Environmental Design (LEED) certification system, developed by the Washington, D.C.–based U.S. Green Building Council (USGBC). The authors’ goal was to determine whether green features affected the market value and effective rents – the rent per square foot multiplied by the occupancy rate. They found that effective rents are 2.8 percent higher in buildings with the Energy Star rating than in conventional buildings. With LEED-certified buildings, although effective rents were slightly higher than in uncertified buildings, the difference was not statistically significant. “But there were far fewer LEED-certified buildings in our sample than Energy Star–certified buildings, so that factor in and of itself reduces the statistical significance of the findings,” Quigley says.
The team also found that energy efficiency seems to drive up the resale value of buildings. “If you simply look at the energy savings on the Energy Star buildings and capitalize those savings, then virtually all the difference in the selling price of the buildings is capitalized energy savings, which suggests that the market is rather good at rewarding energy efficiency in terms of increased market valuations,” Quigley says.
The study has been accepted for publication in a forthcoming issue of American Economic Review. In 2009, the authors conducted a follow-up study, analyzing the same buildings as in the 2007 study to see if the economic premium provided by energy efficiency changed during that time. “To our surprise, there was no decline in the premium for green buildings during the period in which the commercial office market went into decline,” Quigley said, even though selling prices and rents dropped for all categories of buildings, and even though the number of green-rated buildings on the market was much higher by 2009. In that same study, the team repeated the original study using a much larger cross-section of office buildings rated by the LEED or Energy Star systems, finding much stronger evidence that ratings in either system seemed to grant a premium in rents or selling prices. With higher levels of LEED certification – Silver, Gold, or Platinum – those premiums rose even more substantially. The follow-up study is currently undergoing peer review.
Other studies have identified economic premiums for commercial office buildings incorporating sustainable strategies, points out Jeff Kingsbury, managing principal of Greenstreet Ltd., a Zionsville, Indiana–based real estate development, brokerage and consulting firm, and chair of the Urban Land Institute’s Sustainable Development Council. He mentions studies by the London-based construction consultancy Davis Langdon and by the Bethesda, Maryland–based CoStar group, provider of commercial real estate information. With the work of Quigley, Eichholtz, and Kok, “the new information is that the recession doesn’t appear to have affected the momentum that we see in green and sustainable real estate strategies,” Kingsbury says. “It is continuing to be a viable market differentiator and expression of quality.”
Given the economic downturn and the current fundamental restructuring of the commercial office market, “the conversation about sustainability is now much more focused around reducing operating expenses and energy costs,” Kingsbury says. “I think this is positive, that green is being measured much more by its performance. Sustainability will continue to remain a viable differentiator.”