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Head of Green Building Finance Consortium Offers Critique of Recent CoStar Study

Back in March, CoStar released a well-disseminated study purporting to evaluate the financial performance of EnergyStar- and LEED-certified commercial office buildings. The results of the study were highly touted with respect to LEED as CoStar found that such buildings sold at a 64 percent ($171 per square foot) premium and rented at a 36 percent ($11.33 per square foot) premium over non-certified buildings. Last week, Scott Muldavin, Executive Director of the Green Building Finance Consortium, released a report critiquing the CoStar study. Mr. Muldavin suggested a number of reasons why euphoria over the staggering green premiums ought to be tempered, but simultaneously commended CoStar’s effort for providing “a critical first step in promoting an energetic and independent assessment of the financial costs and benefits of green building.”

The critique- which you can access in .pdf format by clicking here (under the “Select GBFC Special Reports” header)- focuses on the limitations of CoStar’s peer analysis, driven largely by the relatively small pool of certified buildings that currently exist (an average of two to four peer properties were identified for each LEED-certified building). For example, Mr. Muldavin pointed out that a “substantial number” of peer buildings were not located in the same submarket as the certified building, with “the majority” of peers located five miles away. He also suggested that although the study controlled sales data on an annual basis (i.e., only compared certified buildings with peer buildings that sold during the same calendar year), the volatility of the real estate sales market during the 2002 – 2007 study period standing alone might explain the 64 percent premium. However, he also noted that this issue will obviously resolve itself in future studies as peer groups increase in size.

Mr. Muldavin also questioned the study’s inability to link specific green features of a property with any associated premium. CoStar did not break out certified buildings by the LEED rating system that the project used, or attempt to account for the fact that different projects may achieve the same level of certification by pursuing different types of credits. Mr. Muldavin acknowledged that doing so would be a “difficult task,” but suggested that the utility of the study was necessarily “limited” because it simply focused on the LEED rating generally. “[S]omething more granular than EnergyStar or LEED is needed to capture the green design elements (features and technologies) that contribute to enhanced environmental, economic, and social peformance (sustainability metrics) which, in turn, link to a building’s value,” he wrote.

The CoStar results are available here; note that Mr. Muldavin’s critique also provides a good summary of CoStar’s methodology in creating the peer group of properties for each certified building. Both CoStar and Mr. Muldavin should be commended for elevating the level of discourse with respect to green building’s financial advantages.

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