Last week, the Royal Institution of Chartered Surveyors (“RICS”) released the results of a study authored by Piet Eichholtz and Nils Kok of Maastricht University and John Quigley of Berkeley. Titled “Doing Well By Doing Good? An Analysis of the Financial Performance of Green Office Buildings in the USA,” the purpose of the study was to determine whether investors are currently willing to pay any premium for green (Energy Star- and LEED-certified) commercial office buildings and, if so, what that premium is. The authors identified 1360 buildings- 286 LEED-certified, 1045 Energy Star-certified, and 29 certified under both systems- and were able to obtain complete building characteristics and monthly rents from CoStar for 649 of them, as well as sales data for 199 buildings that swapped hands between 2004 and 2007. To create a pool of peer buildings, the authors used the CoStar database to identify all other office buildings within a quarter mile radius of the subject green building to create a “cluster” of buildings for each of the 893 subject buildings. The average cluster contained 12 buildings; overall, 8182 buildings were included in the rental data study and 1816 for the sales study. The study concluded that “the type of label matters. We find consistent and statistically significant effects in the marketplace for the Energy Star-labeled buildings. We find no significant market effects associated with the LEED label. Energy Star concentrates on energy use, while the LEED label is much broader in scope. Our results suggest that tenants and investors are willing to pay more for an energy-efficient building, but not for a building advertised as ‘sustainable’ in a broader sense.”
The authors used a standard commercial real estate valuation formula that related the logarithm of the rent per square foot or sales price per square foot of each building cluster to a variety of hedonic building characteristics, including quality, amenities, age, and location. Some pertinent conclusions as set forth in the report are as follows:
- “The results suggest that the LEED rating has no statistically significant effect upon commercial rents, but the Energy Star rating is associated with rents higher by 3.3 percent.”
- With respect to sales price, “[w]hen the certification is reported separately for the Energy Star and the LEED systems, there is no evidence that hte latter certification is associated with higher selling prices.”
- “The premium in rents and values associated with an energy label varies considerably across buildings. It is positively related to the intensity of the climate surrounding the rated building; a label appears to add more value when heating and cooling expenses are likely to be a larger part of total occupancy cost.”
I am extremely curious to see the reaction to the RICS study in the coming weeks. Already, several major media outlets have reported that it demonstrates “certified green buildings rent and sell at a higher price than non-certified buildings,” failing to note the study’s conclusions about the role a LEED rating may play in obtaining that higher price.
I look forward to your comments on the merits of the study once you have had the opportunity to review it; the study is available for download via the link below.