Why green labels boost real estate values
January 11, 2013 | 2 min read
Extensive research on the financial impact of green labels in the commercial real estate
sector shows that tenants not only want to house their companies and
employees in green buildings, they are willing to pay a price premium to
do so. We have documented that buildings with a “green rating” (Energy
Star and LEED) command rental rates that are roughly 3 percent higher
per square foot than otherwise identical buildings -- controlling for
the quality and the specific location of the office building -- and
sales prices of green buildings are about 16 percent higher.
But does the price premium, and demand for green labels, exist in the
residential real estate market as it does in the commercial sector? The
short answer is yes.
The value of green hits home
In July 2012, my colleague Matthew Kahn and I released the "Value of Green Home Labels,“
the largest study of its kind to document a significant price premium
for green-labeled homes. Looking at sales transactions of 1.6 million
homes in California from 2007 to 2012, we investigated the price
implications of the three largest California green labels: LEED for Homes, Energy Star and GreenPoint Rated.
We found that, holding other factors constant, a green label provides
a market premium of 9 percent compared to a similar home without the
label. Considering that the average sales price of a home in California
is $400,000, the price premium for a certified green home translates
into some $34,800 more than the value of a comparable home nearby.
What’s driving the price premium of green homes? Key findings from our study reveal that:
The premium associated with a green label is highest in areas with
hotter climates, indicating that residents value green labels as a
signal of energy efficiency especially in regions where it tends to cost
more energy to keep a home cool;
The premium is positively correlated to the environmental ideology of
the area, as measured by the rate of registration of hybrid (Prius)
vehicles. Just as in the commercial sector, this correlation suggests
some homeowners may attribute value to intangible qualities associated
with owning a green home, such as pride or perceived status. (But also:
the improved comfort and air quality of a green home.)
The bottom line: Green labels, or the characteristics these labels
reflect (e.g., energy savings, water savings, greater home comfort) are
valued by homebuyers and commercial building tenants alike. So what does
this trend mean for the future of green buildings in the residential
We are already observing significant buy-in from builders and
financers of green single-family and multifamily properties. In 2010,
California-based homebuilder KB Homes announced that all new homes in Northern California would be labeled GreenPoint Rated. And in 2011, Fannie Mae launched the Multifamily Green Initiative
to accelerate multifamily green property improvements and explore the
development of a uniform rating system for multifamily properties, which
lags far behind the single-family housing and commercial building
While these initiatives, and consumers’ increasing willingness to pay
more for a green home,will likely increase the market presence of
green-labeled homes, it remains to be seen whether the demand for these
labels will be enough to offset the asymmetry that exists in the
residential sector between the number of green and non-green homes.
However, based on the growing evidence of the financial benefits of
green building in the commercial sector, we expect a similar trend will
soon take shape in the residential green building market.
- Eichholtz, Piet, Nils Kok, and John M. Quigley. “Doing Well by Doing Good? Green Office Buildings”, September 1, 2009.
- “California “green homes” sell for 9 per cent extra”, Nils Kok, Matthew Kahn, www.tias.edu, August 23, 2012.
with attribution (and link, if online) to www.tias.edu.
To be cited as: “Why green labels boost real estate values”, Nils Kok, www.tias.edu, January 11, 2013.
Associate Professor in Finance and Real Estate, Maastricht University