Responsible Investment

A decade of green building certification: proven value

May 25, 2012
Image ‘LEEDS Green building’ by Wonderlane (CC BY 2.0)

Using a panel data approach, research indicates that certified green buildings offer a significant 2.5 to 2.9 percent rent premium over time. So sayAlexander Reichardt,Nico B. Rottke, and Joachim Zietz (all from Real Estate Management Institute, EBS Wiesbaden) and Franz Fuerst (University of Cambridge), the authors of the paper.

“Although environmental certification has only recently emerged from a niche market to becoming a mainstream phenomenon, a number of prominent pricing studies of green buildings have been conducted in the past three years… several cross-sectional and pooled studies have demonstrated that certified buildings command higher rental rates compared to non-certified buildings,” they say.

“However, a potential shortcoming of these studies is that pricing dynamics cannot be studied in a cross-sectional framework as it only provides a snapshot of environmental labeling and certification at a certain point in time,” they continue. “This study takes the analysis of the effects of Energy Star labeling and LEED certification on property's rental rates and occupancy rates one step further by applying panel data regressions, specifically difference-in-differences (DID) and fixed-effects models.”

Using these models, the authors analyzed a sample of 7140 buildings, 1768 of which were certified, with 5372 non certified buildings used as control. The buildings were located in the ten largest metropolitan markets in the US. “The DID models show a significant rent premium for Energy Star from 2004 to 2007. The fixed-effects models suggest an average rent premium of 2.5% for Energy Star and 2.9% for LEED certification over the observation period,” they say.

The proven value (in terms of rental premia and occupancy rates) of certified green buildings, however, becomes less convincing in times of economic stress, as indicated by data collected for the study.“The downturn in financial markets since 2007 has led to a sharp decrease in office rents and may also have affected rent premiums for environmental certification. Although the pressure on companies to behave in a socially responsible manner is undiminished, sustainability may no longer be on top of companies' agendas as economic problems and cost-cutting measures prevail,” say the authors. “A study by Knight Frank (2008)1 shows that sustainable factors had fallen to last place among leasing priorities in 2008.”

References

1 Knight, Frank LLP. Central London Occupier Survey. September 2008.

This article may be reproduced according to our terms of use with attribution (and link, if online) to www.tias.edu. To be cited as: “A decade of green building certification: proven value”, Alexander Reichardt, Franz Fuerst, Nico B. Rottke, Joachim Zietz, www.tias.edu, May 25, 2012.

Read more

Sustainable Building Certification and the Rent Premium
Research Paper

Relevant articles