Sustainability and the Dynamics of Green Building
Nils Kok
Piet Eichholtz
Maastricht University
UC Berkeley
Maastricht University
John M. Quigley
UC Berkeley
European C to C Network, July 2010
Green real estate is hot
Visitors at the U.S. “Greenbuild” conference
30.000
25.000
20.000
15.000
10.000
5.000
0
“Green” building in the marketplace?
Top-10 “green” commercial office markets
Economic significance of “green” building
Implications upon the market for commercial space
 Trends in “green” building may have economic implications
 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
 Case studies on the economic implications


Focus often on new buildings
Results are hard to generalize
Do we still see economic effects of green label?
Investment dynamics and the source of green increments
Sample of 28,000 office buildings (2009 cross section), 3,000 of which
are certified by EPA or USGBC
1. New evidence on the economic premium for green office buildings

Rigorous control for quality differences (PSM)

Label vintage
2. Identify the sources of rent and value increments

Explicit link to

USGBC measures of “sustainability”

EPAs measures of energy efficiency
Example: 101 California St, San Francisco
Energy Star certified, LEED Gold
Example: 101 California St, San Francisco
Energy Star certified, LEED Gold
Findings and implications (I)
Eco-investment real estate sector is not only “doing good”
 Ceteris Paribus, green buildings
1. Have Higher Rents by 2-5%
2. Have Higher Effective Rents by 6-7%
3. Have Higher Selling Prices by 11-13%
 The average non-green building in the rental sample would be worth
$5.6 M more if it were converted to green.
 The average non-green building sold in 2004-2009 would have been
worth $11.1 M more if it had been converted to green.
 This suggests that property investors value the lower risk premium
inherent in certified commercial office buildings
 The missing piece…what are the costs of “greening” properties?
Generalization of the model
Unique premium for each “green” building
 The increment to rent or market value for the green building in cluster
n, relative to the prices of other buildings in that cluster (i.e.,
controlled for location, climate, and quality):
 What is the relation between the variation in the “green”
premium and the LEED-score or energy consumption?
Further regression results
There seems to be an optimal LEED rating
Information on Energy Star-rated buildings
Emissions are substantial, and energy savings create value
 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
 A $1 saving in energy costs is associated with an increase in
effective rent of 95 cents
 A $1 saving in energy costs is associated with a 4.9 percent
premium in market capitalization, which is equivalent to $13/sq.ft.
 This implies a cap rate of about 8 percent
Conclusions and implications (II)
LEED and Energy Star labels seem to be complimentary
 The green increment is systematically related to the underlying
characteristics of energy efficiency or “sustainability”

Market seems to be relatively efficient in pricing these aspects
 LEED and Energy Star measure somewhat different aspects of
“sustainability” and complement each other

Low correlation between LEED-score and EUI-score
2007 – 2009 office market dynamics
Office rents, vacancy rate, and unemployment
Office rents
–30%
Vacancy rate
+40%
Unemployment
+115%
2007 – 2009 office market dynamics
Office rents, vacancy rate, and unemployment
Unemployment
x2
Office rents
–30%
Vacancy rate
+30%
Short-run price dynamics of green buildings
Substantial increase in rated space in a contracting economy
 8,182 observations as of September 2007


694 rated buildings and 7,488 nearby control buildings
Rents, occupancy rates, effective rents
 Same sample matched to financial information in October 2009

Drop buildings that were converted to “green” during the sample period
 We estimate developments in rents, occupancy rate, effective
rents
Conclusions and implications (III)
“Green” is getting mainstream
 Increased awareness of global warming and the role of the real
estate sector have increased attention upon “green” building
 Energy efficient and sustainable office space is now a large share of
the commercial property sector -- 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 period of volatility
in property market…
…but the returns to green buildings are not significantly lower relative to
identical conventional buildings
So what do property investors do?
Property investors talk the talk, but hardly walk the walk
Implementation & Measurement
100
80
Green Walk
Green Stars
60
40
Green Laggards
Green Talk
20
0
0
20
40
60
Management & Policy
80
100
Questions/remarks?
p.eichholtz@maastrichtuniversity.nl
kok@haas.berkeley.edu
www.corporate-engagement.com